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September 21, 2021

Various stakeholders within the global financial markets are seriously unsettled due to the financial predicament of the heavily indebted Evergrande, a Chinese Real Estate Group, and the resultant spillover if the company should eventually go under.

Evergrande, previously Hengda Group, is a leading real estate group in China that was founded in 1996 with operations and developments in over 170 cities. The company sells apartments mostly to upper and middle-income classes in China.

Due to China’s position as the world’s second-biggest economy, and the recent Covid-19 pandemic allegedly starting in Wuhan, China, stakeholders in global politics, governance, and financial markets have learnt that neglecting events in China is to risk global conflagration.



The problem of Evergrande

Evergrande’s issues began with the measures brought in by the Beijing government to control the amount that companies owe. These policies forced Evergrande to sell down some of its properties to pay down debts and keep the company afloat.

Market watchers began to take more interest in the financial position of Evergrande in August 2021, when the news broke that the  Evergrande Group was facing a record number of cases filed by contractors in Chinese courts as pressure mounted on the company's management to reduce its $300bn (217 billion pounds) in liabilities.

The share price of Evergrande has fallen by over 85% this year. On the 20th of  September 2021 Evergrande share price fell by 19% in Hong Kong, an 11-year low point, then partially recovered to 10.2% down at the close of trading.



Possible consequences of the failure of Evergrande
  • Deposits of clients and potential house owners with the company will be lost if Evegrande files for bankruptcy.
  • Construction, design, material supply companies, and other supporting stakeholders will be pushed into bankruptcy.
  • The fall of Evergrande will also rock China financial institutions, as it was estimated that Evergrande owes money to around 171 domestic banks and 121 other financial firms.
  • The failure of Evergrande could crystallise a credit crunch in China and impede the capacities of banks to lend to individuals and businesses.
  • The downfall of Evergrande will be another reputation risk to the leadership of China just like Covid-19 places a question mark on her integrity.
  • Investors may have an additional reason to ply their trade elsewhere if this crisis deepens.
 
The collapse of this leading China property company could stoke a contagion in several markets and possibly spill over into the global economy that is gradually coming out of the depression crystallised by the Covid pandemic. One would expect the Chinese government to intervene and preserve the core business of Evergrande to prevent systemic financial failure, dragging the Chinese and subsequently, the world economy, back to peak Covid levels.