Evergrande crisis in China is still not resolved and may not go without destroying the global economy. It’s impact would be on The whole world, India and you as well. Let’s see how.
Evergrande is majorly a real estate company in China and has a few subsidiaries in soft drinks, Food, EV and etc. It has 1300 projects in 280 cities. Now it has taken $300 billion in debt, has millions of homes empty and no bail out from government. But how did it all start?
In 1980’s, most of the Chinese population lived in the countryside. But when they moved to cities, they were given free apartments by the government. Later, they were allowed to buy them at cheap rates when the government cancelled the no property right law.
Middle class could buy homes now and new homes were needed. So, then came Evergrande at the right time. Evergrande was Incorporated in 1996. It started with creating small living apartments and it was a hit.
Then more and more people kept coming to cities as they used to and the demand kept increasing forever. Evergrande rode on this wave.
The local government was also making money out of it. A third of the fiscal revenue of the local government was coming from land sales. So, real estate companies bought lands from government and then built upon.
It was fine then. The home customers needed to make complete payments before the property was built because they needed capital.
But Evergrande used those funds at other peojects as well. The Chinese government tried limiting and constraining the use of onshore debt to purchase of lands, and so, offshore debt was the other option and lenders were happy lending back then.
The reasons were the past history of real estate, the company’s record and most importantly, they felt Chinese government won’t let the company fail because it was the backbone of the country.
But later, they kept taking more and more debts that now they are in excess of $300 billion. But last year, the government brought a law that created many problems. The government put limits on raising debts in order to gain control on the companies.
It affected many companies but Evergrande the most. They could not raise further and many of their properties were semi prepared. The money taken from customers neither could not be repaid nor they were able to complete the projects. They tried repaying with discounts in apartments but could not make it. Millions of apartments are empty right now.
Their future is uncertain because they are not able to do anything. They have defaulted many interest payments, and as everyone expected the Chinese government would help, it’s not happening.
If they meltdown, it may be bigger than Lehman Brothers, may be.
They got down because of excessive lending, and Evergrande because of excessive borrowing. The reason in both places is same, more returns. They neglected the risk and just saw profits which they could make.
2008 Crisis wiped out $2 trillion from the market and was the biggest crisis since the Great Depression. But, now it may be bigger. The banks would go down too if it failed, their suppliers, lenders, other partners and a lot of companies would get affected by it.
It can surpass $2 trillion. Although, Bharat’s relations with China are not so great, but even we don’t want this to happen right now. But if it fell, global trade would be impacted and rates may again go high and even you would need to spend more on various commodities.
What do you think about all the chaos???
