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22 Oct 2021 20:22
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  •   Home > News > International

    What's going on with Evergrande? Why is the Chinese real estate giant on the brink of collapse?

    If you know one thing about Evergrande, it's that the company's in bad shape. Read this and you'll know a few more things about the embattled Chinese developer.


    Even if you're not a close follower of financial markets and Chinese real estate firms, you might've heard about the company Evergrande over the past few days.

    And if you know one thing about Evergrande, it's that things aren't going well for it — and that could have big implications.

    There were fears the company could default on a couple of interest repayments today. However, it's promised that won't happen for at least one of them.

    But its woes still have the potential to send a shock wave through the global economy.

    Here's what you need to know.

    What is Evergrande? 

    Evergrande (pronounced ever grand) is one of China's largest property developers, claiming to own more than 1,300 projects in more than 280 cities across China.

    It's also expanded its business into a number of offshoots including electric vehicles, media, financial services, sport team ownership, health services and theme parks.

    Riding high during a boom earlier this decade, it borrowed huge amounts of money to finance its growth.

    It used that money to build apartments. And the construction binge meant it also racked up debts and obligations to building suppliers and people who purchased off-the-plan apartments.

    All this has led to Evergrande being considered the most indebted company in the world, owing more than $US300 billion ($400 billion) in various forms.

    Why is Evergrande in trouble?

    The Chinese government has been getting increasingly concerned about the level of debt linked to the country's real estate market, and last year it introduced policies to curb it.

    The real estate industry crackdown clipped Evergrande's wings, stopped it taking on more debt and had the flow-on effect of forcing it to sell apartments at a discount so cash would continue rolling in.

    Further reducing the value of some Evergrande developments is an abundance of empty apartments in some of China's less populous and attractive cities.

    A company announcement on the Hong Kong stock exchange last week said a downturn in contracts meant the company expected "tremendous pressure on the group's cash flow and liquidity", blaming "negative media reports" for a drop in buyer confidence.

    What does all this mean?

    Evergrande is worried it won't be able to sell apartments quickly enough to meet its debt repayments.

    Suppliers and even some employees who were encouraged to invest in the company have been showing up outside its headquarters, demanding restitution.

    Adding to its woes is the fact it has already sold an estimated 1.4 million as-yet unbuilt apartments to off-the-plan buyers, and it's not clear if it can afford to finish building them.

    As a sign of the depth of its problems, its second-largest shareholder, Chinese Estate Holdings, has announced it will pull out of Evergrande, having already jettisoned $32 million of its stake.

    Why does this matter? What could it mean for Australia?

    Real estate makes up a substantial share — more than a quarter — of China's economy, which is the second largest in the world.

    There are fears that if Evergrande goes under, that could spark a domino effect that impacts the wider Chinese property market and economy.

    As China is Australia's biggest trading partner, there could be ramifications here too.

    "If there is a major slump in China's property market, then it has a major effect on economic growth, which of course has a huge impact on global growth, and of course is bad for Australian commodities," Shane Oliver from AMP capital said.

    Australian iron ore is exported to China to make steel, much of which is used for for construction, so a crash in property sales and apartment developments could hit our exports.

    For context, the Department of Foreign Affairs and Trade says Australia exported almost $85 billion worth of iron ore and concentrates to China in 2019-20. 

    Iron ore prices have already tumbled by as much as 60 per cent from record levels set just a few months ago, as fears about China’s economy have intensified.

    Since highs reached in mid-Janurry, Evergrande's share price has plummeted 85 per cent, as the extent of its problems have become clear.

    Things came to a head this week amid intense speculation the company would default on a series of key repayments.

    The immediate concern over the company has abated somewhat, after the company vowed to pay some of the bond interest payments it had been feared to default on today.

    It has not elaborated on how it will achieve this, other than saying it has reached an agreement with some creditors.

    But questions remain over a separate $115.5 million payment due today, or a $65.7 million dollar bond interest payment due next week.

    What is a contagion effect? Could it happen here?

    In the wrong circumstances, financial panic can be as contagious as a cold.

    Much has been said about the potential (or lack thereof) for Evergrande to end up like US investment bank Lehman Brothers, whose collapse marked a turning point in the global financial crisis. 

    However, experts have said an Evergrande collapse would be far less likely to trigger a global crisis.

    “A managed default or even messy collapse of Evergrande would have little global impact beyond some market turbulence,” Simon MacAdam of UK economics research firm Capital Economics said.

    However, that hasn't stopped global markets falling as D-Day for Evergrande has drawn nearer.

    What happens next?

    It's not clear. Although, as we mentioned, the company says it will meet some bond interest repayments due today.

    That announcement was met with relief in global markets, however the underlying issues with the company remain, and experts expect the Chinese government will step in at some point.

    Investors are waiting to see what Chinese regulators might do, but analysts say they appear to be focused on protecting home buyers by ensuring apartments already paid for are completed.

    The Chinese government has injected money into other insolvent companies in the past, but economists say Beijing appears determined to avoid doing that with Evergrande.

    However other options, like a debt restructuring arrangement, may be on the table.

    ABC/AP

    © 2021 ABC Australian Broadcasting Corporation. All rights reserved

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