If Chinese property company Evergrande sinks under its $300bn debt its failure would resound across the global economy.
What is Evergrande?
Evergrande Real Estate – or Heng Da Group in Chinese – owns more than 1,300 building projects in more than 280 cities across China. It’s China’s second-biggest property developer by sales. Its businesses range from property development to wealth management.
Why is Evergrande in trouble?
In short, mounting debt and changing regulation.
Evergrande’s trouble came after years of unrestrained expansion during which its debts grew alongside its size and assets. It is now labouring under a debt pile of more than $300bn.
Some analysts say Evergrande is now the world’s most indebted real estate developer. On Thursday, the company is due to make interest payments of $84m on its offshore bonds but lenders are not holding their breath.
What is the significance for China and its economy?
For the government, the biggest fear is a potential spillover effect hitting the wider Chinese economy. The worsening geopolitical relationship with the west, Covid, as well as the strengthened ideological campaign to assert the influence of the ruling communist party in the economy have already led to fears of a sustained slowdown in the world’s second largest economy.
Reportedly, Evergrande also owes money to about 171 domestic banks and 121 other financial firms. Therefore, if the company defaults completely, there will be consequences for the banking system.
Will Evergrande collapse?
The demise of the company is expected. If handled well, however, the process could inject momentum into Xi’s reform of the Chinese economy.
There’s an expectation in China that Evergrande will not have the full backing of the government. The Global Times’s editor, Hu Xijin, said last week that Evergrande should not bet on a government bailout on the assumption that it was “too big to fail”.
