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Evergrande, China, and World #pebbleinwaterswrites #economy #China #Evergrande

By Jaideep Khanduja @PebbleInWaters
I wanted to explore how Evergrande in China is putting a direct impact on global economy. That was my sole purpose of finding it through various sources and then sharing it with my readers. Evergrande is perhaps the biggest and most powerful real estate giant in China. Of course, its business is not limited to real estate only. Now, this giant is very close to a huge collapse and thus might become a story of the past. After a couple of years, management institutions would be discussing its case study to build some management lessons from it to be learned by the future business tycoons to come. Right now, it is important to understand how this collapse of an internal business tycoon of China is going to put some critical global implications impacting many other businesses and stock markets within China and in the outside world. Evergrande, China, and World #pebbleinwaterswrites #economy #China #Evergrande
September 20, 2021, was a significant day for stock markets of many top countries across the globe. Over 1% each was the drop noticed in the Indian benchmark indices that day. It was, definitely, one of the worst days in Indian stock markets. The US S&P 500 and Nasdaq also faced a similar kind of jolt the same day by facing a drop of 1.7% and 2.2% respectively. That was, in fact, their worst single-day drop since May. There are more shocks in this story. Hong Kong's stock market Hang Seng had a worst of all drop of 4% that day. Luckily, the stock markets in China, South Korea, and Japan were closed for trade on that day. We all know how stock markets twist on the basis of speculations, fears, and financial news of enterprises, commodities, etc., and turbulences across the globe. Evidently, the same was the reason here too. All this happened because of the confirmation of collapse from Evergrande. Evergrande, as I said above, is one of China's largest real estate developer. This disclosure of collapse by the giant itself was more than sufficient to send an alarming signal to put global markets into a panic. It is important to understand how far China is from a doomsday scenario? As I said above, Evergrande is a conglomerate in China. It is into many businesses like electric vehicles, financial services, healthcare services, entertainment parks, media businesses, pig farms, movie production, music festivals and a large share of bottled-water production. It also owns a football team named Guangzhou F.C. or Guangzhou Football Club. Evergrande has a share of 56.71% in it. Alibaba is another major shareholder in this club with 37.81% stake in it. A few of the stupid business decisions by Evergrande were to build a crab shaped artificial island costing more than $15 billion and the world's largest stadium at the cost of around $2 billion, that too when the overall league was facing survival issues. You might ask, how all this is impacting other countries across the globe? Here lies the reason. In order to fulfill such kind of fancy dreams, Evergrande needed a huge backup of money to fund these projects. To build that backup, Evergrande started borrowing money from various resources across the globe. Since, it was one of the global 500 companies, it managed to borrow a huge amount and thus accumulating a debt of more than $300 billion. This was just a little before the beginning of the pandemic. Evergrande, by then, had become the most indebted developer of China. And then the pandemic arrived. This debt and all of a sudden crisis started impacting Evergrande badly. Its cash flow from profit making business arms started drying up. New government rules in China restricted Evergrande to borrow further. That was the time when Evergrande started selling its assets. So, once China's top-property-seller became China's largest-ever defaulter while struggling with more than $300 billion of debt. Evergrande was trying to raise around $5 billion by selling its major stake in its property management business. While Evergrande was not able to gain further borrowings due to new rules imposed in China, and there was no significant inflow of cash, it was left with no other option but to sell its properties and assets. Initially, it was successful in selling a few of its top ones, but then buyers became hesitant in buying its assets to avoid any legal implications later.
Evergrande was left with no money on hand. Thus, all its development projects came to a halt. Almost 1500 property development projects got impacted severely. Evergrande had no money to pay salaries to its employees. The biggest blow came when it announced it was not in a position to make payments of around $150 million to its creditors, that was due in the last week of September. That was sufficient to create panic among its creditors. Evergrande was at the verge of becoming a defaulter, probably one of the biggest defaulters in the history of China. There were millions of people who had already paid for their properties, which were under progress. Firms across the globe had no other option than to write-off loans amounting to around $300 billion. Major bondholders of Evergrande included investors like Fidelity, HSBC Holdings, Amundi, BlackRock, Goldman Sachs, UBS Asset Management, and so on. This one failure of Evergrande might slow down the business of real estate industry across the globe. That will cause a recurring negative impact on the demand for commodities like metals, and other construction material. There was an immediate drop of 9.5% in the share price of Tata Steel in India as soon as the Evergrande declared their inability to pay global debts. But Indian steel stocks bounced back strongly in no time, as the world has now started looking for alternatives in the global markets to lower their dependencies on China. China's infrastructure building projects within the country and in several other countries are getting impacted quite seriously. China is in a real bad shape and is not far from getting caught in a debt trap that might result into a death trap of its economy. The central Bank of China is in no good condition to step in and help Evergrande pay its debts. It tried injecting $17 billion into the system to help Evergrande not to default on its global loans. That helped Evergrande resolving one of its due payments but not all. On September 23, Evergrande failed to pay more than 80 million of loan and had a 30-day grace period to clear the payment before it gets declared a defaulter.

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