Debt problems at Chinese real estate firm, Evergrande, puts entire market at risk

A collapse of epic proportions is in the making, but the question on everyone’s mind is: could this be another 2008 moment?

Evergrande, China’s largest property developer, is $300b in debt and on the verge of bankruptcy. Over $100m in interest is owed over the next few days, and banks are not expecting repayment – which could send ripple effects across the globe.

Evergrande’s house of debt collapses

In the last twenty years, China went through the biggest property boom in history with Evergrande at the center of the growth. As it grew, Evergrande expanded into bottled water, electric vehicles, and even sports teams – peaking in 2018 as the world’s most valuable real estate company.

Today, the company owns 1300 projects in 280 Chinese cities. But the property boom slowed – and with a mountain of debt to be paid, Evergrande’s cash flow is drying up at the wrong time:

• Chinese home sales dropped 20% in August, slowing Evergrande’s cash flow.
• To raise money, the company is trying to sell its assets – with no buyers to be found.

Years of borrowing finally caught up to Evergrande – and with lenders knocking, the only option left might be bankruptcy.

How big is Evergrande?

Big enough that its $300b debt load accounts for nearly 2% of China’s GDP. Evergrande executives pledged to complete its 1.6 million unfinished property developments – but it doesn’t have a great track record with promises…

• Evergrande owes employees $145m in repayments after strong-arming them to invest personal funds into the company.
• Its stock is now down 86% on the year – and 47% this month.

According to Goldman Sachs, US investors should fear the domino effects on global businesses.

If Evergrande does default, its lenders could fail to meet other obligations, impacting even more businesses… A domino effect similar to the start of the 2008 financial crisis when the US let the financial institution, Lehman Brothers, fail.

Investors: A repeat of the 2008 financial crisis?

When a company as big as Evergrande falls, it affects businesses across the globe – with some industries already showing signs of cracking:

• Commodities: Chinese real estate accounts for 20% of the demand for steel and copper, and a significant portion of other commodities.
• US businesses with Chinese exposure: A recession could hurt companies with heavy sales in China like Starbucks, Apple and Caterpillar.

Will Evergrande be left to fail like Lehman Brothers during the financial crisis? Likely not, according to David Rosenberg, ex-chief economist of Merrill Lynch. At 25% of China’s GDP, housing is too important and some sort of debt restructuring deal is more likely than bankruptcy.