EVERGRANDE DEFAULT - THE CAUSE AND FUTURE IMPLICATIONS - Oikantik Sinha

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On Thursday, Evergrande was declared to be in default by rating agency Fitch, due to the company not meeting its offshore bond obligations. This event was hardly unforeseen, as the liabilities of this major Chinese property developer have grown to over $300 billion this year. In this article, we will discuss what caused this crisis, what are investor sentiments, and what this event means for China and the rest of the world.

How did the Evergrande crisis arise?

The series of events that have led to the present situation of Evergrande began with the Chinese government’s policy of providing easy credit access to property developers. Companies such as Evergrande utilized this credit availability to aggressively buy land across the country. This eventually led to a rapid increase in land prices and prices of real estate subsequently followed a similar suit.

In an attempt to remedy this situation, the Chinese government introduced the “Three Red Lines” limit, which would allow companies a 15%,10%,5%, and 0% increase in their annual debt based on the number of red lines breached. According to these regulations, Evergrande was not qualified to draw any additional debt. The company had taken up large amounts of debt during the property boom period for its expansion efforts, but eventually, it found itself unable to meet its obligations. This situation was further compounded when property sales in China saw a significant downfall during the pandemic.

Investor sentiments and what the future holds

Investors globally are concerned about this situation, as the Chinese government has failed to provide any meaningful communication about how it plans to resolve this situation. A major reason companies such as Evergrande attracted investments was due to the belief that the government would ultimately step in to bail out their biggest companies in case of a crisis.  

Evergrande’s collapse could lead to events that would impact investors worldwide. Banks would be burdened with a mound of unpaid loans, suppliers would take a hit in revenues and customers would be left with incomplete houses. This may lead to a loss of investor confidence in the Chinese real estate sector, leading to disinvestments and further defaults. Real estate also accounts for a major portion of Chinese household investments. A collapse would lead to losses for most retail investors as well.

There have however been reports of the Chinese government working towards helping Evergrande resume its normal operations. Steps such as these could eventually lead to the restoration of investor sentiments and could help to de-escalate this situation.


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