What happened to the international market? Why did we suddenly see a big red across all the geographies?
Let’s try to bucket the main cause here:
• Evergrande group crisis.
• How Evergrande came in such Bizare Circumstance.
• Is the Chinese government going to help?
• How it is going to affect China and its allies.
• Evergrande crisis impact on India.
Evergrande Group declared bankruptcy on Sep. 14, 2021, after years of unrestrained expansion and heavy debt during which its assets and liabilities grew at a rapid pace; currently, it is under a debt of more than $300 billion. It is now the most indebted real estate in the world and it could cause big problems to China’s economy. Evergrande has already told the banks that it won’t be able to pay upcoming interest payments. Evergrande has sold some assets which are related to its subsidiary companies but it’s not enough to cover its debt repayments
China Policy on Real-estate and effects on Evergrande.
China last year developed a system to curb perilous borrowing, dubbed the “three red lines”, under which property developers since last August have had to ensure a liability-to-asset ratio of under 70% and a net gearing ratio of less than 100% percent. Failing on the wrong side of these lines, companies like Evergrande would be restricted from borrowing more money.
Evergrande owns assets in various sectors:
1. It has an electric vehicle company.
2. A soccer team
3. A Bottled water business.
Now, let’s have a look at the Numbers
The Company last year generated $77 billion in revenue and has two payments unpaid this week. Firstly, an $83 million interest payment is due by last Thursday, with a grace period of 15 days, according to some research. And the other repayment for a different bond of ~47.5Mn is due Sept. 29.
Is China going to help?
In recent times, China has taken a strong stance against the heating real estate market. The recent implementation of “three red lines” is an example of such a stance that would prevent real estate developers from taking debt beyond a certain threshold. Thus, the short answer to the billion-dollar question is – “probably NOT”
Mainstream investors believe that Evergrande will not be able to pay the debt obligation this week. Some of them are also calling it China’s Lehman moment referring to the collapse that happened in 2008 by the US investor bank Lehman Brothers which led to a global financial crisis.
But, the threat of such a wider consequence is low. If the company fails to fulfill its debt obligations, the stress in the foreign financial situation would be on a temporary basis.
In the event of defaults, China’s banking system can reportedly absorb the same. It has Evergrande’s $18 billion of pending foreign-currency bonds and the Chinese banks have an annual profit of 1.9 trillion yuan and reserves of 5.4 trillion yuan against bad loans.
Now let’s explore, how the Evergrande crisis affect India?
One way to look into this is what would happen to the export business in India –
If China faces an economic strike, then, this could be problematic for India’s commodity-exporting companies. If the Yuan depreciates while the Chinese slowdown then’ India will face heavy competition with Chinese companies in exports.
Perhaps, a fraction of the market also believes that this might be good for us in the long term because multiple incidents which happened including the Covid-19 pandemic and the USA-China war have triggered global companies to look for Chinese alternatives.
Shubham Agarwal (CFA L2 Candidate | MBA candidate at University of Cambridge, UK)
Want to discuss this further or have questions regarding finance/strategy? Feel free to connect here – https://www.linkedin.com/in/shubhamagarwal13/