Why is world shocked by Chinese company's troubles?

DH Deciphers | Why is the world shocked by the troubles of a Chinese company?

Evergrande's liabilities, now estimated at $300 billion, come at a time when the global economy is still crawling in its recovery from the pandemic

The logo of China Evergrande Group seen on the Evergrande Center in Shanghai, China September 22, 2021. Credit: Reuters photo

Chinese real-estate giant Evergrande is at the risk of defaulting on its loan payments, sparking worries in the markets and endangering the global economy. India hasn't been spared. Many have called it China's "Lehman moment." 

Evergrande's liabilities, now estimated at $300 billion, come at a time when the global economy is still crawling in its recovery from the pandemic-induced recession. The anxiety has been aggravated by speculations of Beijing's refusal to arrange a bailout, thus doubling down on its regulatory crackdown on debt-ridden companies. But what's exactly troubling the Chinese company and why its crisis is such a big deal for the entire world?  

What's behind Evergrande's troubles? 

The real-estate developer built China's famed cities from dirt and populated them with skyscrapers, generating jobs and a steady housing market for the middle-class. Construction became one of the key factors behind China's jaw-dropping economic growth. 

The property market was Chinese developers' golden goose. They borrowed massively to build more properties and even enter other profitable spaces. (Evergrande owns a football club, whose manager is a former Real Madrid player.) 

Things were rosy until prices became too high and erratic. The demand simply fell. 

The Communist Party-led government announced plans to cut financial risks and reduce debts from the economy dating back to 2018. Under those norms, private companies like Evergrande have to sell off businesses and settle debts to stay under the limits. 

China also began policy intervention into property developers' illegal practices which, in some ways, made them invincible. These practices include misleading advertisements, delays in handovers and receiving payments for half-built properties. 

Evergrande cracked under pressure. 

The company is yet to provide lakhs of apartments to home-buyers and billions of dollars to raw material suppliers. On top of that, anxious employees have flocked to its offices, suspecting indefinite extensions in payday. 

The collapse of the real-estate hero, on whom many investors have poured billions, may have a cascading impact on China's economy and induce a negative sentiment against other developer players in the sector. 

The Evergrande crisis is also largely seen as a lesson-teaching moment for China, which is increasingly trying to put brakes on rising home prices. 

How has the world been affected? Does India have to worry? 

China is a massive importer of construction materials that aid the real-estate sector, which makes up 29% of its economy. The Evergrande crisis had sparked a global sell-off. The markets got some relief only on Wednesday after the conglomerate assured to pay the $83 million interest payment due on Thursday. However, tension remains in the air as many await intervention by the Chinese government. 

In India, steel companies have taken a hit in the markets with values dropping by 10-15% over the past few days. 

Is China going to do something about it, if at all? 

Analysts and investors have been increasingly betting on a Chinese government bailout that could lift Evergrande out of the crisis. "We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy,” S&P Global Ratings said in a report. 

For the longest time, industry players, investors and creditors assumed Beijing would step in during a crisis of a similar scale. Many experts have pointed out that China's institutional power, meaning its ability to control the cash flow in the country, could save Evergrande from defaulting and prevent a large-scale collapse. 

Economists, however, say China is avoiding the perception of the bailout saviour as it plans to force private companies to cut their debts under the regulatory goals of their economy. 

In 2014, a small private firm, Shanghai Chaori Solar Energy, defaulted and made a mark as the first corporate default in China, ending the era of government bailouts. 

As for Evergrande, the chairman Hui Ka Yuan wrote to the company's employees, assuring it would fulfill its responsibilities, and "walk out of its darkest moment."