Evergrande 'not too big to fail': Chinese state media

Chinese property giant Evergrande is on the brink of collapse, and analysts warn the potential fallout could have far-reaching implications that spill outside China’s borders.

“Evergrande’s collapse would be the biggest test that China’s financial system has faced in years,” says Mark Williams, chief Asia economist at Capital Economics.

Here’s how bad its problems are, and what’s in store for investors.

How did we get here?

After expanding rapidly for years and snapping up assets as China’s economy boomed, Evergrande is now snowed under a crushing debt of $300 billion.

The world’s most indebted property developer has been scrambling to pay its suppliers, and warned investors twice in as many weeks that it could default on its debts.

On Tuesday, Evergrande said its property sales will likely continue to drop significantly in September after declining for months, making its cash flow situation even more dire.

The Chinese developer is so huge that the fallout from a potential failure could hurt not only the Chinese economy, but spread to markets beyond.

Banks have also responded to its deteriorating cash flow. Some in Hong Kong, including HSBC and Standard Chartered, have declined to extend new loans to buyers of two uncompleted Evergrande residential projects, said Reuters.

Ratings agencies have repeatedly downgraded the firm, citing its liquidity problems. Evergrande’s problems intensified last year when China introduced rules to rein in the borrowing costs of developers. Those measures place a cap on debt in relation to a firm’s cash flows, assets and capital levels.

Its share price plunged nearly 80% so far this year, and trading of its bonds was repeatedly halted by Chinese stock exchanges in the past weeks.

What does Evergrande do?

Evergrande is everywhere. Its main business is in real estate, and it’s China’s second-largest property developer by sales.

Evergrande owns more than 1,300 real estate projects in over 280 cities in China.
Its property services management arm is involved in nearly 2,800 projects across more than 310 cities in China.
The company has seven units dabbling in a wide range of industries, including electric vehicles, health-care services, consumer products, video and television production units and even a theme park.
The firm says it has 200,000 employees, but indirectly creates more than 3.8 million jobs every year, according to its website.
Evergrande’s shares and bonds are included in indexes across Asia.
Who will be affected?

The pool of affected parties include banks, suppliers, home-buyers and investors.

Evergrande warned this week its escalating troubles could lead to broader default risks.

It said that if it can’t repay its debt, it may lead to a situation of “cross default” — where a default triggered in one situation may spread to other obligations, leading to broader contagion.

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[Phown]

When media tells you not to panic, it's time to panic

[khoirulanam]

Evergiven: The Suez Canal incident, I burned $54 billion of the world economy!!!

Evergrande: Hold my $300 billion in unpaid bills!!!

[merrimac]

Imagine that: China is more capitalistic than the USA government which would have never let them fail.

[glasss]

Poor people think about what they can buy with their money, Rich people think about what they can invest in with their money 💰💰💰;

[imobiliarebotosani]

more than 10 years in the making....the ghost towns finally come to a stop...for now

[utopia]

Not to big to fail I actually endorse greed without fear leads to tears.

[janniemeyer]

For the people thinking that china will enter a recession. I will tell you it will not, this is an example that china want to show about private companies. Remember china has said this year that private companies are gaining to much power and evergrande is one of the most powerful private companies, china will use it as an example and will bail evergrande out but people will be skeptical about private companies and will remove money from these private investors weaking private companies power over the government.
(Sorry for my bad english)

[vietimports]

the leaders of evergrande are going to go on a very long vacation

[Observer]

Evergrande will just go into receivership and all assets will be owned by the state. The largest developer in China just becomes a state owned enterprise. 😃😃😃

[dtrain-uwu]

$300 billion dollars that is owed to creditors and they are about to default on their loans. Holy hell. I should call my mom.

[addictivethoughts]

EVERGIVEN and EVERGRANDE what a coincidence this year with almost the same name! 😂

[hbrhbr]

wish this happen in Europe.. housing prices are out of control. No one can afford a dam apartment in the city centre anymore

[coldbrewed]

Holiday? People are freaking out across the world..

[yvvonelee]

Jack Ma learned a very costly lesson and was quick to acknowledge, perhaps, this guy in Evergrande refuse to kowtow to Comrade Xi

[boonedocksfl]

Wow after 2 weeks you finally cover it.

[Valhalla]

Supposedly Blackrock is the largest foreign holder of Evergrande debt. This should get interesting.

[ssssssssssss]

I've seen videos of evergrande investors protesting and rolling on the floor in pain, for their greed led them to a bad decision. You're an investor, learn that losing everything is part of the game.

[mutharemix]

They also said that COVID 19 is a little flu! When Lehmann went down they had dept by 200 bn an was getting demands by 1, 2 tn Dollars - so what comes out now?

[craigthebrute]

Privatize the profits & socialise the losses!

[philkeh]

I sold all of my China stocks because of the Evergrande bankruptcy. That's too hot for me at first ... 75% of the capital of a Chinese household is in real estate. The government must now try to keep house prices artificially high. How this works is unclear. It can all get pretty panicked because a lot of the Chinese growth of the last few years is going down the drain. 28% of GDP depends on a growing real estate sector that is now no longer allowed to grow. That will be exciting, but for Chinese stocks one can expect turbulent months in which a lot of negative things can still happen. This is not a small story that can be regulated away from time to time. This is a solid bubble in the country's most important industry that has to be popped in a controlled manner and that will also have negative effects on the Chinese stock exchanges because an extremely large amount of capital will be destroyed that is not available for consumption. There is probably less bearish potential for the global economy. But for Chinese stocks, this can lead to some panic selling on the part of Chinese investors. Depending on how the government reacts in the next few months. So I'm only referring to Chinese titles with caution for now. Chinese stocks that are primarily listed in China or Hong Kong, such as BYD, are already subject to high volatility anyway because many people in China play the stock exchange more like a casino. This investor behavior paired with the current uncertainty on the Chinese real estate market can easily lead to panic overreactions where discounts of up to 50% can occur. I prefer to have my money outside at the moment to step back in at low prices when it comes to that.