On Thursday China told local governments to brace for 'possible storm' of Evergrande collapse.At the same time Indian reality stocks zoomed up giving a 10 year breakout all these have been happening after the crisis in the Chinese realty market and on today's weekly blog we are going to discuss the evergrande crisis and it's implications on India.
China Evergrande Group shares plunged on Monday to over 11-year lows, extending losses as executives try to salvage its business prospects and as default fears grow over a looming deadline for payment obligations this week.
Evergrande has been scrambling to raise funds to pay its many lenders, suppliers and investors, with regulators warning that its $305 billion of liabilities could spark broader risks to the country’s financial system if not stabilised.
But the thing is — This has largely been their own doing. For years now, the Chinese government has facilitated easy financing options for the likes of Evergrande —one of China’s largest real estate group. These companies in turn have relied on cheap debt to lap up land parcels across the country. With a fixed land stock, this incredible buying spree has created an artificial scarcity of sorts. The scarcity thus precipitated, has indirectly pushed land prices higher. And the increase in land prices has fed into the boom in property prices.
So what is Evergrande company all about?
Evergrande, a company that started out in 1996 selling bottled water followed by a stint in pig farming, now owns China’s top professional soccer team (Guangzhou Football Club, managed by former Real Madrid centre back Fabio Cannavaro), and has long been the poster boy of the Chinese real estate boom. It rode on a sustained property prices surge in China — the main driver of the post-pandemic Chinese economic expansion — to expand into more than 250 Chinese cities selling home-ownership dreams to the country’s middle class.
Why is Evergrande in trouble?
Evergrande expanded aggressively to become one of China's biggest companies by borrowing more than $300bn.
Last year, Beijing brought in new rules to control the amount owed by big real estate developers.
The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.
Now, it is struggling to meet the interest payments on its debts.
This uncertainty has seen Evergrande's share price tumble by around 80% this year. Its bonds have also been downgraded by global credit ratings agencies.
Why would it matter if Evergrande collapses?
There are several reasons why Evergrande's problems are serious.
Firstly, many people bought property from Evergrande even before building work began. They have paid deposits and could potentially lose that money if it goes bust.
There are also the companies that do business with Evergrande. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.
The third is the potential impact on China's financial system.
"The financial fallout would be far reaching. Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms," the Economist Intelligence Unit's (EIU) Mattie Bekink told the BBC.
If Evergrande defaults, banks and other lenders may be forced to lend less.
This could lead to what is known as a credit crunch, when companies struggle to borrow money at affordable rates.
A credit crunch would be very bad news for the world's second largest economy, because companies that can't borrow find it difficult to grow, and in some cases are unable to continue operating.
This may also unnerve foreign investors, who could see China as a less attractive place to put their money.
How will this impact India?
Stocks of several top Indian steel, mining and chemical companies including some of the index’s best-performing stocks like Tata Steel, Jindal Steel, SAIL, JSW Steel, Tata Chemicals, NMDC and DCW have gone down by 10-15% in the last five trading sessions.
All these companies would have had receivables from or linked to the Chinese real estate firm. This could now be in jeopardy, if Evergrande goes down.
Commodity exporting companies will continue to take a hit if this crisis is not sorted out in time and if the contagion does indeed spread.
Sources:
https://www.5paisa.com/news/explained-how-serious-is-evergrande-crisis-and-how-it-can-affect-india
https://indianexpress.com/article/explained/quixplained-china-evergrande-crisis-7532688/
https://news.yahoo.com/china-tells-local-governments-brace-152500569.html
https://www.bbc.com/news/business-58579833
https://finshots.in/archive/what-is-the-evergrande-crisis/
Social Plugin