This Evergrande debacle is just a sign of catastrophe for China’s Industrial investors. With the wounds of the 2008 financial crisis still fresh and with the onset of the pandemic, one can rightfully claim that Evergrande’s declaration for bankruptcy seems to play horrific scenes of the past. The horrific scenes pertaining to unemployment, market tumbling, inflation, lower investment, etc. have emphatically crippled the global economy. One analogy that can be drawn from both the bankruptcies is that an industry-leading firm has immense power, so much so that it can ruin and pull a nation or the world economy down with it.
Can Evergrande debacle debt default mean for China?
To state that the real estate firm is in some grave trouble would be an understatement. It was latest by Monday that it was reported that Evergrande has failed to make its due interest payments. Additionally, these interest payments are just not to be made to one bank but at least two banks which are emphatically one of the largest in China. With its recent detestable trends of default, various analysts are of the view that there is a high possibility that loan repayment of a humungous $83.5m in dollar-bond interest would not be paid, and is due on Thursday.
Why is Evergrande’s default being considered as the Lehman brothers moment for China? Firstly, the humongous debt had been owed to the two largest banks in China. Thus, the shockwaves of non-repayment of loans will be sent across the economy. Secondly, the Chinese economy, at the moment, is frail and is slowing given that the recurrence of the virus and low consumer confidence. Thus, with an already slowing economy, a huge default can be ill afforded. In fact, various analysts are of the opinion that Evergrande’s debt default could hugely send shock waves through not only the Chinese economy but also the global economy.
But ate such predictions true to some extent? It is to be noted that China in the financial year 2021 is much different from the USA in the financial year 2008. Thus, it is quite ambiguous that to what lengths the Chinese government is ambitiously and dedicating willing to go to contain the financial upheaval that is currently brewing at Evergrande.
Evergrande debacle- the recipe for disaster
It is to be noted a dubious title has been awarded to Evergrande- the real estate firm that is the world’s most indebted real estate developer. According to the reports, the real estate developer currently effectively has 1,300 real estate projects in China which are spread across 280 cities. In addition to its real estate vertical, it is also involved in the electric vehicle production market and theme park construction. Consequently, it also has its foot in the life insurance, and healthcare sector.
Given the diverse nature of the company, it is quite right to state that the effect of its bankruptcy will be felt against various sectors. According to reports, the total liabilities of the company stand at $300bn.
What does the debacle mean for traders?
To state that the traders in and outside China are worried about the contagion effects of Evergrande would be an understatement. This has its roots in the 2008 Lehman Brothers debacle. Lehman’s bankruptcy had had a contagion effect on the other major financial institutions that it had trading relations with. Thus, various traders are worried about the fallout of the Evergrande and what it will mean for their own business.
Also what makes the fallout of the company even more odious is the fact that globalization has interconnected various economies around the world. Thus, given the fact that China is the third-largest economy, its ripple effect has the potential to effectively and seriously affect the financial institutions and nations across the world.
What are the recent ripple effects?
It is to be noted that there are some signs of ripple effects that can be witnessed in some markets. This includes the Hong Kong market, whose Hang Seng Index fell by 3.3 percent. On the other hand, its properties index fell by a whopping 6.69 percent.
To put these numbers in perspective, the index has hit a 52-week low.
This was an example that was closer to home. Talking about global markets, US stocks too registered a fall that was reported to be the biggest drop since the month of May.
The ripple effect does not stop there, it is to be noted that the ripple effect has found its way to the commodities market too. According to reports, it sent the copper prices plummeting to nearly a one-month low.
With that being’s aid, it is worthy of mentioning here that the effects of the debacle will not be only felt in the industries that were connected with Evergrande. In fact, a fall will be witnessed in all the markets, even the technology market, which makes less sense. This is due to the fact that people tend to show irrational behavior when a possible threat materializes. Such a claim can be corroborated by the fact that cryptocurrency sank all the way down to $40,468 recently.
What does this mean for the housing market in China?
It is a high possibility that the industry as a whole may see significant trouble ahead. This will be mainly due to plummeting demand for housing. These would also emphatically mean changing the demographics of China.
Edited by Kriti Ghosh.