How China’s Evergrande Group Crisis Affects Investors

China Evergrande Group Crisis: A Full Explainer & How It Affects Your Investments

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How China’s Evergrande Group Crisis Affects Investors

China’s second-largest property developer, China Evergrande Group, has been hogging headlines recently for all the wrong reasons. Here’s the full story behind this company’s recent woes.

“The bigger they are, the harder they fall.” Almost everyone in the world is familiar with this idiom and Chinese property developer China Evergrande Group has been falling hard indeed.

What was once the world’s most valuable real estate brand is now in a serious debt crisis and risks falling under unless the Chinese government steps in.

To shed some light on the company’s liquidity issues, it has an estimated debt of US$300 billion and can’t repay the interest on loans that it has taken up. This is still the case after it sold off properties at discounted rates, amongst other assets. Salt to the proverbial wound, as they say.

Evergrande’s share prices have no doubt been affected too, but more on that later.

The man on the street might be perplexed at the level of coverage that China Evergrande Group’s crisis is receiving. After all, it’s common to see companies winding up for some reason or another, especially in 2020 and 2021.

However, the beating that China Evergrande Group is taking has far-reaching implications across markets globally.

Here’s all you need to know about China Evergrande Group’s debt crisis and who it affects.

But first, who is China Evergrande Group?

China Evergrande Group is China’s second-largest property developer, founded in 1996 and becoming a publicly listed company on the HKEX in 2009.

Its founder, 62-year-old Hui Ka Yan, is among the richest and most influential individuals in China. However, China Evergrande Group does more than just develop property across the eastern Asian nation.

The company is also the owner of Chinese football club Guangzhou Evergrande. If you’re a football fan, little needs to be said about how much the club has invested in players, managers, and infrastructure.

China Evergrande Group also has its fingers in pies that don’t have anything to do with real estate, including electric vehicles, insurance, and even mineral water.

With regards to its core business, China Evergrande Group has worked on over 1,000 projects in more than 250 cities across China. Therefore, its reputation as one of the nation’s largest property developers is well-earned.

However, what the company did to achieve this is partially why it’s in trouble today, along with having an investment portfolio that’s perhaps a bit too well-diversified.

Why is China Evergrande Group in trouble?

Essentially, the company is caught in the middle of a storm. Firstly, the way it operated for years was risky. It took on property development projects at a breakneck pace – an average of 40 a year – and accrued debt just as quickly.

And that’s not counting its other investments. Before COVID-19 and the ensuing global recession, it could still pay off interest owed to creditors.

Unfortunately, the aforementioned black swan events coincided with the Chinese government cracking down on debt. To be exact, it was limiting the amount of debt that property developers could accrue.

Measures that the government introduced included imposing credit limits and stopping property developers from refinancing short-term debt.

Source: Yahoo Finance

When combined, all these prevented China Evergrande Group from generating the same level of revenue that it used to. In fact, investors had predicted that China Evergrande Group would run into issues years ago.

Share prices have trended downwards ever since they hit a peak of HK$32 in October 2017. And rock bottom would arrive on 21 September 2021, with China Evergrande Group trading at approximately HK$2.25 per share.

And who can forget its ‘well-diversified’ investment portfolio? A large amount of money was pumped into Guangzhou Evergrande Football Club, as mentioned above.

The same could be said for its electric car company Evergrande New Energy Auto, elderly care firm Evergrande Health, and more.

What are the effects of China Evergrande Group’s woes?

Firstly, people who put down deposits for homes – often hefty ones – are left in the lurch. Construction at China Evergrande Group’s various residential projects around the country has stopped, so potential homeowners won’t be moving in anytime soon.

People even gathered outside the company’s headquarters in Shenzhen to protest on 16 September 2021.

Then, there are people and businesses who need to be paid. These include suppliers, investors, creditors, and more. According to a report by the Wall Street Journal, China Evergrande Group had to resort to paying contractors and suppliers in the form of unfinished apartments.

To say that its liquidity is poor at the moment is a gross understatement.

There are additional implications to this as well. These very contractors, suppliers, and other companies have had to scramble to offload said unfinished properties onto other firms. Consequently, they’ve had to introduce pay cuts or delay payments to their employees.

Fortunately, these firms can still move on and work with other property developers in the future.

As for China Evergrande Group, there have been layoffs aplenty amid this whole saga. Investors have been dumping its shares by the truckload too. Lastly, staff members who are still employed at its headquarters have stopped receiving the free meals that used to be provided daily.

What are the global implications of this saga?

China Evergrande Group’s troubles have caused investors to worry about China’s property market as a whole. Stock markets across the world dipped, with the S&P 500 index dropping from US$4,545.85 on 1 September 2021 to US$4,305.91 twenty days later.

Needless to say, it was the same story for the Hang Seng Index and Straits Times Index.

Even cryptocurrencies tumbled, as Bitcoin’s price saw a whopping S$10,000 drop across the same period of time. Sadly, it was the same story for Ethereum, Cardano, and other high-performing cryptocurrencies. Commodities weren’t spared either, with copper and crude oil seeing price dips.

Michael Hewson, Chief Market Analyst of CMC Markets, said in an interview with the BBC, “The fear of an Evergrande bankruptcy appears to be leading to concern about China’s very own Lehman [Brothers] moment, and a big overspill across the region.”

Whether the Chinese government will save the property developer remains to be seen. However, signs currently point to aid being provided, but not a complete bailout.

Investors and individuals who have bought homes from China Evergrande Group will be ‘protected as much as possible’, according to S&P credit analysts.

Conclusion

China Evergrande Group’s crisis is solid proof that the way real estate developers have been operating in China is untenable. Therefore, Chinese government crackdowns will prevent firms from taking on unrealistic levels of debt to finance rapid business expansion.

Although China Evergrande Group was attempting to slash its debt in 2020, it was a case of too little, too late.

A Lehman Brothers-esque financial crisis due to China Evergrande Group’s collapse is possible, but the government is more concerned about reining in the country’s real estate sector first.

Finally, there are companies waiting on the wings to save this embattled real estate developer, but they’ll be more than happy to see this saga unfold for a little longer.

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By Ebel Tang
A geek culture enthusiast who’s also a little too invested in the wide world of whisky and watches. And no, he was not named after the Swiss timepiece brand.