What is China’s Evergrande crisis? How it is affecting the financial markets

What is China’s Evergrande crisis?

China’s top developer firm Evergrande is under immense pressure as anxious investors recently protested at its Shenzhen headquarters and demanded repayment of loans and financial products. The Hong Kong-listed developer is sinking under a mountain of liabilities totalling more than USD 300 billion after years of borrowing to fund rapid growth, Channel News Asia reported.

Amid the increasing pressure over unpaid loans, China’s property giant Evergrande Group’s has started a repayment plan for its wealth management products through properties.

However, the debt-ridden property giant’s prospects of weathering the current liquidity crisis still remain gloomy, Global Times reported.

Why is Evergrande in trouble?

According to the Chinese state media report, repayment through properties is one of the three options Evergrande offered on the overdue payment of its wealth management products after hundreds of investors headed to the company’s headquarter in Shenzhen to demand the repayment of their investments.

“For investors, apartments are not as liquid as cash, but they still have enough value, so the option may not be the best result, but not the worst either,” Shen Meng, director of Beijing-based boutique investment bank Chanson & Co, told the Global Times on Sunday.

Last week, Evergrande was downgraded by two credit rating agencies. Its shares have also tumbled their 2009 listing price. The development came recently as news reports speculated Evergrande’s imminent collapse.

Last Tuesday, the company’s shares fell nearly 9 per cent and are down almost 80 per cent since the start of the year. An estimate by Capital Economics said that that Evergrande has about 1.4 million properties that it has committed to complete – about 1.3 trillion yuan (US$200 billion) in pre-sale liabilities, as of the end of June, according to Channel News Asia.

Why does Evergrande collapse matter?

There are several reasons why Evergrande’s collapse matters and this problem is really serious. Many people have bought a property with the organisation even before the construction work began and they have paid the deposits which could potentially get stuck if it goes bust.

Companies that do business with Evergrande like construction, material suppliers, and design firms are at probable risk of incurring major losses which can lead them towards bankruptcy.

As per reports, Evergrande owes money to around 171 domestic banks and 121 other financial firms. If Evergrande fails to pay then it could lead to a credit crunch where companies struggle to borrow money at affordable rates.

A credit crunch will be very bad news for the financial markets.