Chinese property giant Evergrande is on the brink of collapse. Evergrande owes more than 300 billion dollars (22.5 lakh crore) to their creditors and has no scope to settle their debt. Chinese citizens who bought their homes in Evergrande projects now want their money back. They believe their hard-earned savings could go down the drain BACKGROUND Evergrande is China’s biggest real estate player. It holds approximately 2% of the Chinese real estate market. The company has seven units of businesses in a wide range of industries namely Real Estate, Electric vehicles, Healthcare services, Consumer products, Video and Television production units and a Theme Park. 84.68% of the shares of Evergrande are owned by the promotors, 2.32%of Shares Held by Institutions, 15.1% of Float Held by Institutions and 147 Number of Institutions Holding Shares 1 - It holds more than 1300 projects in 280 cities over 1.5 million people are waiting for their homes to be completed by Evergrande 2 - Evergrande builds 600000 homes every year on average. 3 - To build these projects, Evergrande borrows money and it borrows a lot 4 - In the last decade, the company's debt level has grown 56 times 5 - It is estimated that over $1 trillion worth of unfinished homes is stuck due to the financial woes of the company. 6 - The shares of Evergrande began tumbling since the beginning of this year 2021 they've fallen by 81% Real estate contributes close to 29% of China’s economic output. The debt bubble is so big that it could burst any moment. It poses a dire threat to the Chinese economy. Evergrande is so big that if it fails it could not only hurt the Chinese economy but the effects can also affect markets outside China China has also been favourable to investors by offering better interest rates payment. Insurance companies, Pension funds, Asset management companies, and Sovereign wealth funds have gravitated towards China to earn a positive yield on their bond investments. Before the current crisis, real estate developers in China were giving a yield of over 10% on their bonds, attracting global investors. Is Evergrande the next Lehman Brothers? Lehman Brothers were once the 4th largest Investment Banker in the world. Lehman Brothers bankruptcy is one of the most significant bankruptcies in U.S history. Lehman brothers took a bunch of loans to buy assets that quickly lost most of its value due to the housing market crisis. They filed for bankruptcy on September 15 2008 and it had very negative effects on the stock market. Like Lehman Brothers, Evergrande is massive and its effects will be widespread. The People’s Bank of China started capping lending and borrowing to focus on three financial ratios to curb speculation in real estate activity. At the end of the June 21 quarter, Evergrande breached all three metrics. Evergrande’s failure will haunt the Chinese economy and will cause serious repercussions on China’s international trade. Beyond the market impact, the collapse of Evergrande could affect China's economy, the second-largest in the world after the United States, and a key catalyst for global growth The next Lehman Brothers scenario is likely not to happen if the Government of China backs Evergrande Government Bailout The Chinese government should step forward and help Evergrande in the settlement of debts through a Government Bailout. The only option to save Evergrande is government intervention in the form of a bailout. A government bailout is a form of financial help by the government to the respective companies who are on the brink of filing bankruptcy. The Chinese government will most probably intervene and back Evergrande but if it fails to back Evergrande, there will be serious negative effects not only for China but also for all the players who are dependent on China Thank you.
Amazing Ashwin! You have simplified this and made it easy to understand, good one
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