A Bubble Burst in China?
Chinese corporates have debts worth $1.3 trillion mounting over their heads. How?!
The biggest real estate developer in China, a global Fortune 500 company, Evergrande, is staring at bankruptcy. It has debts worth 1.97 trillion Yuan (~ $305 billion) which is 2% of China’s GDP. If it falls, it’s taking the world down.
So, how did Evergrande find itself in this situation? And most importantly, what will be the scale of its fall, if it happens?
Read on.
Evergrande was founded in 1996. Since then, it has grown its real estate business on the back of high debts. And debts came easy in a growth-hungry China, which was in a race to boost its infrastructure. In fact, the company’s debt level has grown 56 times in the last decade. It is the top-most borrower in China.
All this, however, wouldn’t have been a matter of worry if the Chinese regulators would have kept the tap of debts open for them. But that wasn’t going to be the case anymore.
The Chinese regulators are now forcing the industry to start paying off debts. The debts, after all, have run into huge amounts.
But, this wasn’t the only problem for Evergrande. With its ambition to get into everything, it manufactured some problems of its own.
It bought a soccer team. It is building an exquisite lotus shaped soccer stadium at an investment of $1.7 billion. It got into the food and beverage business, bottled water business, and groceries. It did not even leave the Electric Vehicle business. The EV business was worth $87 billion until April 2021. That too without selling a single car!
A few days back, the company confessed that it was under tremendous pressure. If it defaulted, it could trigger a situation like this:
How so?
More than 128 banks and 121 non-banking institutes have lent money to Evergrande (in finance lingo, it’s called ‘exposure’). But it’s not just big institutions that will suffer from a potential default.
The company has 800 projects in China that are unfinished. More than 1.6 million properties have not been delivered to home buyers (who have made payments). The share prices of Evergrande have fallen by 80% this year itself. To top it all, the company asked its own employees to lend it money, if they wanted to get ‘bonuses’!
China’s debt problem runs deeper than Evergrande. In the next 12 months itself, Chinese corporates have to repay debts worth $1.3 trillion. More than 2,00,000 companies declared bankruptcy in the initial months of 2020.
The tragedy of the situation is that the demon of debts has been raised and unleashed by the Chinese government itself. China prospered with debts. But, the price of its default will have to be borne by the entire world. How?
Keep an eye on this space as we unveil China’s shadow banking and web of debts!
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