The shares of Chinese real estate giant Evergrande have suffered a sharp fall, with the company suffering a 10 point collapse this Monday. The company, a giant in the Chinese housing market, is due to pay this week $83.5 million in interest loans while it has to pay $47.5 million, however, there is one key problem for Evergrande: is running out of money.
According to estimates by the Wall Street Journal, the Chinese company owes $89 billion on outstanding debt in June of this year, while the total amount of debt is the biggest in any publicly traded real-estate company in the world.
Evergande and the Chinese housing market
Evergrande was founded in the 1990s by Xu Jiayin with the aim of being part of the forming housing industry, which flourished as millions of Chinese citizens went from the countryside to the cities and needed a place to live. The company went public in 2009 and expanded into other industries (like soccer and oil) and managed to get millions in funding by foreign investors and Chinese banks, which were willing to do this as Xu was politically connected to the CCP.
Evergrande’s model of business was simple, it sold apartments before they were built, which allowed them to garner enough cash to continue its operations. However, the sheer amount of debt that the company was acquiring earned the attention of the Chinese government which trie then set some standards to avoid companies like Evergrande getting even more loans.
The Chinese housing market has been a center of debate and concerns among economic and financial centers for a while, with the images of massive ghost towns across the country being pinpointed as the obvious illustration of a market bubble in the housing industry.
Is this the beginning of a new financial crisis?
According to the Journal, the financial situation at Evergrande has become so dire that the company began paying suppliers and contractors with unfinished properties instead of actual money. To make matters worst, the company reported a contraction in its sales numbers in August and was expecting this trend to continue in September, a month that usually presents strong numbers for the Chinese real estate industry.
Other real estate developers from the region also suffered a significant sellout on their shares, with Henderson Ladn Development Company, a Hong Kong giant in the industry suffering its biggest drop in years. Hong Kong’s Hang Seng index suffered a 3.3% loss.
The sharp fall in Evergrande’s shares has been followed by similar downturns in financial markets across the world, with the Dow Jones falling more than 400 points in a single day, the Standard and Poors and NASDAQ index also suffering a decline in their numbers.
The Beijing clampdown on borrowing has affected Evergrande, which has been forced to stop construction in many of its projects as it lacks the cash necessary to finish them, leaving hundreds of thousands of Chinese buyers with the prospects of being left out of a home they have already paid for, usually with their life-savings.
Another concern over the potential consequences of Evergrande is the fallout this could have in Western bonds, with some funds in Europe and the US already suffering a decrease in their prices due to growing concerns over Evergrande’s finances. Although the drop in Evergrande has been compared with the collapse of Lehman Brothers, which marked the beginning of the 2008 Financial Crisis, some experts have argued that both situations are very different.
Chinese leader Xi Jinping will now have to decide how to address the seemingly inevitable collapse of one of the biggest companies in the housing market and how such a decision could have an effect on the Chinese economy as a whole. Does he allow the company to fall on its own? Does he try to have a “managed collapse”? Or will the Chinese government bail out Evergrande? Certainly, Xi will do the most to avoid an economic crisis that could affect China’s capabilities and willingness to increase its infuence in the world.