Evergrande explained: One-off crisis or China's version of Lehman Bros?

China Evergrande crisis, real estate developer, restructure loans, borrowing options, biggest debt piles, bank loans, operating income, Chinese credit market, Lehman Brothers

MUMBAI: Though the global equity market has decided today that it wants to acknowledge the existence of a crumbling real estate giant in one of the largest property markets in the world, the Evergrande crisis has been brewing for a long time.

Evergrande is the second largest real estate developer in China and was at one point part of the illustrious Fortune 500 companies list put out by the US-based Fortune magazine. The company made its mark during the infrastructure-fuelled growth binge of the Chinese economy back in the 2000s, after the Global Financial Crisis.

So what’s going wrong?

China has told state-owned lenders of Evergrande that the real estate developer was in no position to repay interest that was due on Tuesday. While media reports have suggested that Evergrande was in talks to restructure loans with its banks, the company had previously suggested that it was at risk of default due to stuck receivable and restricted borrowing options.

Tell me more…

Evergrande holds one of the biggest debt piles in all of China and the world. The company’s last recorded debt pile stood at close to $300 billion, including bank loans, short-term borrowings and supplier credit.

According to Ming Zhao, former hedge fund manager, Evergrande has interest payments of 180 million yuan (1 yuan = Rs 11.39) every day as nearly 35 per cent of its debt was interest bearing. According to Evergrande’s annual report, its cash position was merely 150 billion yuan, suggesting that unless the company could raise more money or get extremely favourable restructuring terms, it would go belly up.

Last week, the company was not able to meet a repayment on short-term debt and asked investors to take a haircut and accept a quarterly repayment schedule of the outstanding dues.

How did Evergrande land here?

In China, most real estate developers were able to take up large amounts of short-term debt as they could easily refinance these through their contacts in the shadow banking system. Under Xi Jinping, however, China wants to address the endemic bad loans problem that plague its banking sector by severing backstops like refinancing of short-term debt and imposing credit limits of real estate developers, which constricted their ability to generate revenue from new projects. This was evident when the Chinese authorities allowed Huarong to default — the first banking default in China in more than 20 years — and its crackdown on shadow lenders.

Further, real estate business is a long gestation business with elongated cash conversion cycles. Most of the cash in a real estate business is held up in inventories and receivables that can take months to realise.

Further, Evergrande’s management is known for its largesse. The company invested billions of dollars into the football business, which the Chinese government has started to crackdown on due to it becoming a playground for China’s nouveau riche to exhibit their wealth. On top of that, the real estate company diversified into unrelated fields such as electric cars, streaming media, amusement parks and healthcare. The cash ploughed into these businesses were tantamount to burning them during winter to warm your hands.

Evergande’s operating income has crashed 75 per cent since 2018, while its gross margins have shrunk more than 1,000 basis points in that period. Earlier this month, the company said property sales would fall in September, usually a buoyant month for the real estate sector, due to waning confidence.

So what now?

Evergrande is most likely to default to lenders one by one as weak sales, lack of outlet to monetise existing inventory and credit freeze from lenders leave the company short on cash. However, since state-owned banks are the senior most creditors, they will get their dues first when the fire sale of the real estate developer begins. Everyone else will be left with the skeletons.

The larger issue here is the second order effect it will have on the Chinese credit market. Remember, China is the second largest economy in the world and the largest consumer of commodities and other services. If Evergrande goes down, it will take its millions of suppliers with it to whom it owes billions of yuan. Further, it could cause a lending freeze in the entire credit system, in the manner the Lehman Brothers’ collapse did in the US or IL&FS’ bankruptcy did to the Indian money markets.

The only saving grace could be that Xi may not want a full-blown crisis in his hands, and the emergency liquidity injection by the People’s Bank of China on Saturday suggests the central bank will try to fight the situation to contain wider damage to the financial system.

Oddly enough, just like the Lehman Brothers’ collapse on September 15, 2008, no one genuinely thought Evergrande would crumble until it did.

Internet Explorer Channel Network
News Related


PM Narendra Modi to address the nation at 10 AM today, tweets PMO

© Provided by Firstpost PM Narendra Modi to address the nation at 10 AM today, tweets PMO Prime Minister Narendra Modi will on Friday address the nation at 10 am, ... Read more »

COVID-19 vaccination drive shows world the power of Team India, says Narendra Modi

© Provided by Firstpost COVID-19 vaccination drive shows world the power of Team India, says Narendra Modi Celebrating India’s milestone of administering 100 crore COVID-19 doses on 21 October, Prime ... Read more »

Alec Baldwin discharged prop gun in accident that killed cinematographer, injured director, authorities say

An accident involving a firearm on the set of the upcoming film “Rust” has left the director of photography dead and the director injured. Star Alec Baldwin discharged the prop gun ... Read more »

Man charged with the murder of heavily pregnant nurse Janet Dweh

© Provided by Daily Mail MailOnline logo A man has been charged with murdering a young mother who was just weeks away from giving birth to her fourth child. Janet ... Read more »

Court orders Barilaro COS explain herself

Former NSW deputy premier John Barilaro’s chief of staff has narrowly avoided being subject of an arrest warrant over a pre-trial matter related to the prosecution of a YouTube channel’s ... Read more »

Truckie infectious in Brisbane but no cases linked to ‘very ill' ride-share driver

Queensland authorities say an interstate truck driver has been infectious with COVID in the Brisbane community for two days, as they reported no new community cases linked to the case ... Read more »

Biden says he will consider 'doing away' with the filibuster

© Provided by Daily Mail MailOnline logo President Biden said he would consider ‘doing away’ with the filibuster to pass voting rights legislation, but cannot push to get rid of ... Read more »

Himachal Pradesh-Uttarakhand tragedy: Army recovers bodies of 5 trekkers, rescues 2

© Provided by Zee News New Delhi: Army on Thursday (October 22, 2021) recovered five bodies and rescued two people from snow in a rescue operation with Indo-Tibetan Border Police ... Read more »

Queen Elizabeth II spent night in hospital after scrapping trip: Buckingham Palace

Buckingham Palace said Thursday that Queen Elizabeth II spent a night in a hospital after being advised by her doctor to rest. The palace said the 95-year-old British monarch went ... Read more »

SGX Nifty up 20 points; here's what changed for market while you were sleeping

After a three-day beat down, the domestic equity market is likely to regain some strength on Friday. Asian stocks opened lower, before gaining some strength, whereas US stocks settled with ... Read more »

Asian tech shares jump, China property stocks rally as Evergrande makes payment

TOKYO: Tech stocks climbed in Asia on Friday, following U.S. peers higher, while Chinese property stocks rallied following a surprise interest payment by debt-ridden property developer China Evergrande Group. Meanwhile ... Read more »

RIL shareholders approve appointment of Saudi Aramco Chairman as independent director

© Provided by Business Today RIL shareholders approve appointment of Saudi Aramco Chairman as independent director Reliance Industries sought the approval of its shareholders to appoint Saudi Aramco chairman Yasir ... Read more »

Qantas moves up flights as Australia expects tourists soon

1 / 4Virus Outbreak AustraliaHairdresser Caroline Shamoon of Joey Scandizzo Salon works on a client’s hair in Melbourne, Friday, Oct. 22, 2021. Melbourne, Australia’s most populous city after Sydney, came ... Read more »

Friday's top brokerage calls: JSW Steel, Asian Paints, LIC Housing and TVS Motor

© Provided by CNBCTV18 © Provided by CNBCTV18 Jefferies on JSW Steel, jsw steel, jsw steel price, stock market, brokerage calls Jefferies on JSW Steel | The brokerage sees the ... Read more »

Parents share safety, security concerns at Mansfield ISD town hall in wake of shooting

Parents and community members on Thursday shared concerns over safety, security and communication in schools during a town hall hosted by the Mansfield school district. The town hall, held two ... Read more »

FBI says human remains found in Florida belong to Brian Laundrie

© Provided by dw.com Brian Laundrie was a person of interest in the death of his girlfriend Gabrielle Petito, but was never criminally charged The FBI confirmed on Thursday that ... Read more »

Nissan ex-chair Ghosn set on restoring reputation

© Copyright 2021The Associated Press. All right reserved Japan Carlos Ghosn – Copyright 2021The Associated Press. All right reserved Carlos Ghosn, the former auto industry superstar whose career screeched to ... Read more »

Blake Lively blasts Instagram account for posting image of her children

© Provided by Cover Media Blake Lively Blake Lively has called out an online fan account for posting an image of her children. Earlier this week, the people behind an ... Read more »

Agent was ‘insistent' for Emiliano Sala flight to go ahead, court told

© Provided by The Guardian Photograph: Aaron Chown/PA A plane operator organised the flight in which the footballer Emiliano Sala was killed after a Premier League agent made “insistent” phone ... Read more »

Woman dies after actor Alec Baldwin fires prop firearm on film set

A woman has died and a man has been injured after Alec Baldwin discharged a prop firearm on a film set, officials have confirmed. © Sky According to Santa Fe ... Read more »

4 of 10 Singapore IT leaders not confident with cyber-security

© Provided by Singapore Business Review Nearly 4 out of 10, or 43% of Singaporean IT leaders, said that they are not fully confident in their ability to deal with ... Read more »

NY Fed's Williams says rising home prices don't pose financial stability risks

© Reuters/CARLO ALLEGRI John Williams, CEO of the Federal Reserve Bank of New York, speaks at an event in New York (Reuters) – U.S. home prices are rising rapidly because ... Read more »

Taiwan delegation irks China with eastern Europe tour

A Taiwanese government delegation is visiting three eastern EU members to the dismay of China, which is irritated by any signs of Taiwan acting as an independent country. © SAM ... Read more »

Biden at pains to explain how he'll convince Manchin and Sinema to support budget and infrastructure bills

At a town hall hosted by CNN on Thursday, President Biden was repeatedly asked about the status of contentious budget negotiations with Democratic Senators Joe Manchin of West Virginia and ... Read more »

Biden says U.S. has ‘commitment' to defend Taiwan from Chinese attack

President Joe Biden on Thursday didn’t hesitate when asked whether the U.S. would come to Taiwan’s defense if China attacked. © Evan Vucci/AP Photo President Joe Biden participates in a ... Read more »

Husband of Missing Calif. Mom Maya Millete Pleads Not Guilty to Her Murder

© Provided by People Facebook May “Maya” Millete Larry Millete, the husband of missing California mom May “Maya” Millete, has pleaded not guilty to her murder. The plea was entered ... Read more »

Alec Baldwin fatally shoots crew member in prop gun ‘misfire' on New Mexico film set

Alec Baldwin fatally shot a movie crewmember with a “prop firearm” during a film shoot in New Mexico, authorities said Thursday. The shooting also injured the film’s director, a county ... Read more »

Recovering Paine eyeing return to cricket

Tim Paine is targeting a return to cricket through a second XI game for Tasmania as the Australia captain strives to prove his fitness ahead of the first Ashes Test. ... Read more »

Districts with over 5% positivity rate fall to 51 from 55 in October 14-20 week

The number of districts reporting over 5% positivity rate – a criteria used internationally to gauge the Covid-19 spread – have further declined from 55 to 51 in the October ... Read more »

SC to Centre: How did you fix Rs 8 Lakh as EWS quota ceiling?

The Supreme Court has asked the Centre to explain how it fixed ₹8 lakh as income limit for determining whether someone qualified for seats reserved for Economically Weaker Sections. After ... Read more »

Duterte eyes deeper ties with Saudi, 7 other countries

President Rodrigo Duterte sought deeper cooperation and friendship with Saudi Arabia and seven other countries. Duterte expressed this intent as he received the credentials of ambassadors from Saudi Arabia, Belgium, ... Read more »

Three to go in Dublin 2 – ‘Googletown' apartments from €735,000

Hanover Court, Grand Canal Dock, Dublin 2 Agent: Lisney (01) 6382700 There are just three two-bedroom apartments left at Hanover Court at Grand Canal Dock in Dublin 2. Built by ... Read more »

Legion-hosted concert will benefit reconciliation fund, raise awareness

The sounds of the Tragically Hip will echo through  the Aurora branch of the Royal Canadian Legion this Saturday for Rockin’  for ReconciliACTION, a concert benefiting the Gord Downie and ... Read more »

Narendra Modi Address LIVE Updates: Day After India's 100-Cr Covid Jabs Milestone, PM Set to Deliver Speech at 10 AM

© Provided by News18 Narendra Modi Address LIVE Updates: Day After India’s 100-Cr Covid Jabs Milestone, PM Set to Deliver Speech at 10 AM Narendra Modi Address LIVE Updates: Prime ... Read more »

'Damaging and disheartening:' California teacher on leave after being filmed chanting in faux Native American headdress

A Southern California high school teacher was placed on leave after a video recorded by a student showed her chanting and dancing around her classroom in a faux Native American ... Read more »

Crew member dead, another injured after prop gun discharged by Alec Baldwin accidentally misfires on set

UPDATE 10:15 p.m. ET: Halyna Hutchins, 42, the film’s director of photography, and Joel Souza, 48, the film’s director, were the individuals shot, according to the Santa Fe County Sheriff’s ... Read more »

Rapper Young Thug sues apartment complex where he lives over stolen songs, money

Hip-Hop artist Young Thug has sued his apartment complex accusing its employees of letting an unknown person take his designer bag that had unreleased songs and more than $100,000 worth ... Read more »

AP FACT CHECK: Biden overstates his record on COVID vaccine

WASHINGTON (AP) — President Joe Biden botched the numbers behind the COVID-19 vaccine rollout Thursday as he stretched to take all the credit for the surge of shots once he ... Read more »

Trump's new venture

The former president has announced the launch of a new social media company, “TRUTH Social.” ABC News’ Andrew Dymburt has more. Read more »

Trump Plans to Regain Social Media Presence With New Company

Trump Plans to Regain Social Media Presence With New Company (Bloomberg) — Former President Donald Trump on Wednesday announced a deal that would enable him to regain a social media ... Read more »
On free-english-test.com you will find lots of free English exam practice materials to help you improve your English skills: grammar, listening, reading, writing, ielts, toeic