Looming fall of Evergrande symbolises current plight of Chinese economy

October 22, 2021

Kunal Sawhney

With Chinese real estate giant the Evergrande Group advising overnight that there is “no guarantee” that it can meet its US$305 billion debts, starting with a deadline on Monday that could trigger a default, the implications for global financial markets, as well as for the Group’s interests in entertainment, sport and tourism are significant.

Shares in Evergrande, China’s second-biggest property developer with thousands of projects, fell in early trading on Thursday amid concerns about unsustainable debts, sparking fears of contagion in China’s real estate sector.

This followed Evergrande having announced on Wednesday that it had formally abandoned plans to sell a 50.1% slice of Evergrande Property Services, one of its most profitable units, and said there was “no guarantee” it could meet its financial obligations in order to stay afloat.

The company has been trying to offload assets since September to generate funds to repay creditors, starting with 1.6 million homebuyers who have bought as-yet unfinished properties off the plan, building contractors and suppliers, and then Chinese banks and bondholders.

Evergrande also owes billions of dollars to offshore bondholders and has already missed several key bond interest payments since September.

Explaining Evergrande’s crisis and its consequences, regular Australasian Leisure Management contributor, Kunal Sawhney, Chief Executive of Kalkine Media, writes that China’s transformation from an agrarian economy into a capitalist structure was quick. Following the transformation, big conglomerates like Evergrande emerged that took China to new heights and helped it become one of the most powerful nations in the world. However, as they say, “change is the only constant in life,” Evergrande’s fall symbolises China’s current plight.

Before the fall of Evergrande
As China embarked on a journey of transforming into a capitalist structure, Evergrande emerged. It gave a path for the Chinese villages to become metropolitan cities. Initially, it tapped upon the middle-class community of China, and later, it escalated its business by venturing with other big giants.

Businessman Hui Ka Yan was the first founder of Evergrande; initially, it was known as the Hengda Group in 1996 in southern China. Now, Xu Jiayin is the man behind the brand Evergrande. He became one of the most influential people in Beijing and beyond. His brand owns several food brands, manufactures electric cars, and sponsors one of the biggest football teams in China.

What pushed Evergrande into trouble?
Evergrande expanded its business exponentially via lumpsum borrowings. However, recently the Chinese government changed its policies in a bid to restrict big conglomerates like Evergrande to depend upon an extensive borrowing system.

Currently, the real estate developer owns more than US$300 billion to its investors. And, after the Chinese Government’s new amendments, it had to offer its properties at discounted rates so that the money would keep coming.

Due to selling property at heavy rates, the company incurred huge losses and couldn’t pay off the recent interest payment to its investors. As a result, the share prices of Evergrande immediately dropped as low as 80%, and the bond prices are now also rated low by global credit rating agencies.

What implications does the world have to bear following Evergrande’s fallback?
When big conglomerates like Evergrande suffer losses, the implications are manifold. The capitalist world is highly intertwined. Businesses, organisations, committees and individuals, all work together in a co-dependency system. And, when one suffers, the effects are to be borne by others too.

Such is the case with the recent troubles faced by Evergrande.

The company wouldn’t pay its interest instalment to the inventors, which shook the market. If Evergrande falls ultimately, the consequences would be enormous for the Chinese economy and the world economy.

First of all, being the biggest real estate company in China, thousands of people had purchased properties from Evergrande before the construction work began. So, if Evergrande becomes bankrupt, all the buyers will lose their deposits. In addition, other construction and design firms that work with Evergrande would also incur losses if it gets busted.

However, the most significant consequence would be borne by the Chinese financial system. Evergrande has borrowed money from 171 domestic banks and 121 other financial firms. So, if the company becomes bankrupt, the Chinese financial system will receive a significant backlash.

If that happens, the Chinese financial system will have a credit crunch, following which other companies would face issues in borrowing.

Being the second-largest economy globally, China has manifold impacts of its domestic economy onto the world economy. If the country gets into a credit crunch, it won’t be a good sign for businesses, especially when the industries are finally getting back on track after a stagnancy of more than a year.

Besides, the enormous implication of the credit crunch would be that foreign investors would be hesitant to invest their money into China. Thus, the country has to see how it’s going to manage its business and financial system without making any of the two suffer.

As well as real estate, the Evergrande Group has interest in the automotive, health, food and agriculture and finance industries.

In leisure its interest include:

Tourism and recreation
Evergrande owns two major theme park brands 'Hengda children of the world', 'Hengda water world', and a large tourist on the Chinese island of Hainan to spend.

The under-construction Ocean Flower Island in Hainan is one of its major projects.

Sport
In 2010, the Group acquired Guangzhou Evergrande FC of the Chinese Super League and invested heavily to acquire top players. In 2013, under Marcello Lippi, the group won the 2013 AFC Champions League. Alibaba also has a 50% stake in the football club.

In April last year, Evergrande commenced construction on the Guangzhou Evergrande Football Stadium.

The company is a sponsor of the Women's Guangdong Evergrande Volleyball Club and runs the Evergrande Football School.

Entertainment
The Group operates HengTen Networks, which purchased Ruyi Pictures in October 2020 and has run the Hengda Music Festival Tour Concert.

Kunal Sawhney, Chief Executive, Kalkine Media

Images © Lewistse | Megapixl.com (top), the new stadium being built by the Group for Chinese Super League champions Guangzhou Evergrande (middle) and © Casfotoarda | Megapixl.com (below).

About the author

Kunal Sawhney

Chief Executive, Kalkine Group

An entrepreneur with revolutionary ideas, Kunal Sawhney is a financial professional with wealth of knowledge in equities who aims to transform the delivery of equity research through tech-driven digital platforms

With his knowledge, skillset, and overarching vision, Sawhney established Kalkine (a business that is based on Digitally Powered Architecture and Extensive Data Science led Premium Research) that has become one of the fastest growing equity market research firms across Australia in 2014; and subsequently, in other emerging and developed markets.

Sawhney’s entrepreneurial and commercial skills backed by the passion to establish a tech-empowered research platform, helped in building Kalkine’s global presence across diverse geographies - Australia, New Zealand, Canada, and the United Kingdom. Further, the plans for the US launch in 2021, have set the premise for attaining an all-encompassing client reach for Kalkine’s Subscription and Media Operations.

With a Master of Business Administration degree from University of Technology, Sydney; Sawhney’s business acumen has enabled his brainchild, Kalkine, help clients navigate through equity related matters in a proficient and seamless manner.

Sawhney is featured regularly on CNBC, Sky Business, Biz News, Daily Mail, Yahoo Finance, KCBS Radio (Audacy), Bloomberg, Sydney Morning Herald, Global Banking and Financial Review and many more.

Click here to visit the Kalkine website.

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