What Will Happen To The World’s Economy If Evergrande Defaults?
What will happen to the world’s economy if Evergrande defaults? What is Evergrande and why is it so relevant to the economy? Joseph Stiglitz speaker, a Nobel Prize winner in Economics and former World Bank Chief Economist talks about it in his keynote speeches to Fortune 500 companies and leading organizations.
Evergrande, the Chinese real estate conglomerate, is apparently saddled with a massive debt load exceeding US$305 billion (£220 billion). There have been heated protests at company headquarters, shares have fallen, and the financial world is worried about its future.
Simply put, the situation at Evergrande is critical as several economics speakers describe. And the potential ramifications of its problems extend far beyond the corporation itself, with disastrous consequences for individual Chinese property owners, businesses, and the global economy.
The key question is whether or not Evergrande will declare bankruptcy. The corporation has categorically dismissed the possibility and claims that it will find a way out of the mess. However, some industry analysts believe that the business may eventually file for bankruptcy. According to reports, Evergrande’s assets would be managed by a state-owned investment firm.
From the Chinese government’s standpoint, the goal will be for Evergrande to reach an agreement to repay its debts, therefore reducing the impact of its failure on the financial industry. Those most at danger are the firms it owes, which may go bankrupt, or the banks it owes, which may lose so much money that they are unable to lend to other businesses, which may also go bankrupt.
And, because Evergrande borrowed extensively from state-owned banks, this conclusion places tremendous pressure – and a potentially large loss – on the Chinese government’s shoulders.
In an attempt to ease anxieties, Evergrande chairman Xu Jiayin said on September 21 that the business will pay the yearly interest on a US$600 million loan. This is intended to comfort the company’s employees while also sending a favorable signal to the company’s stakeholders.
So far, such regulations appear to have had at least a temporary impact on the stock market, which has fallen precipitously in the last six months. Evergrande’s stock price increased on September 23, but worries arose the next day after an interest payment was missing.
The Knock-On Effect
Evergrande’s problems will have an immediate impact on China’s once-booming housing market. The industry now accounts for 7.3 percent of the country’s GDP, up from 4.1 percent in 2000. It is a market that has been over-expanding for many years, with other large development corporations’ debt levels already quite high. If Evergrande fails, it will have a cascading impact on the industry, perhaps leading to the loss of other companies.
Indeed, China Chenxin Credit Rating Group (CCXIS) has already lowered China’s property sector’s outlook to negative. This adjustment makes it considerably more difficult for such businesses to get financing, aggravating the debt problem and increasing the cost of borrowing.
Beyond the realm of real estate, Evergrande’s demise would have far-reaching consequences in other industries in which it is involved, such as consumer electronics, building materials, furniture, and electric vehicles.
Property in China Has Been Growing
The situation is still fluid, and it is difficult to forecast what will occur next. However, in the long run, Evergrande’s future, if it has one, maybe more in line with China’s longer-term plan of making more housing available to more people.
The Chinese government has stated that it intends to offer inexpensive housing for regular people, lately reiterating the ideology of “shared prosperity” and the idea that a house is for living in, not investing in. As a result, Beijing is eager to cool the overheated real estate market and the direct total investment to strategically essential areas including semi-conductors, new energy, and medicines.
However, private enterprises of all sizes are likely to be impacted by the fallout from Evergrande – a private enterprise that has evolved into an economic behemoth. Meanwhile, state-owned firms in these strategically critical industries are expected to acquire a competitive edge in terms of confidence and resources.
The Chinese government may have other pressing priorities in the near future. If Evergrande declares bankruptcy, it will be forced to undertake the costly task of protecting tens of millions of house owners while preventing civil upheaval.
This article has been published in accordance with Socialnomics disclosure policy.