Wall Street takes a big dive: Evergrande $300 billion debt crisis is a cautionary tale for investors
Wall Street took a sharp dive as global market sell-off continues for debt-saddled Chinese property developer Evergrande.
It was a tough day for investors as Wall Street marked its biggest drop since May amid the intensified Evergrande crisis.
The market experienced a global sell-off as payment deadline loomed for the struggling Chinese property developer. Concerns that the company will default on the offshore bond sparked chaos in global markets.
It’s a cautionary tale for equity traders and continues to grip the financial world.
Today, we look at Evergrande, its disastrous performance and share some insights into the market.
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What’s happening with Evergrande?
Chinese markets fell on September 20, as concerns grew in global markets over a possible default by property developer Evergrande on an international bond repayment.
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The real estate company has been straddled with debt for years with total liabilities of more than $300 billion. Evergrande is due to pay $35.8 million in interest on September 22 on an onshore bond maturing in 2025, and the Hong Kong market has seen the company’s shares tumbled by almost 85%.
With billions in liabilities, Evergrande is struggling to remain liquid and to raise funds to pay its many lenders and suppliers.
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Fred Razak, Senior Trading specialist at CMTrading, shares his insights into the Evergrande crisis:
“Evergrande is one of the largest Chinese real estate developers. This situation has actually been unfolding for quite some time and was probably to be expected.
Ever since he took office, the President of China wanted to take responsibility for the economy. Instead of an inflated GDP he wanted a real GDP to be created, and in order for him to do that, he had to build economic austerity.
This was to ensure that reporting companies in China were reporting real growth as opposed to inflated growth and as a result, this had to be corrected.
“These types of companies had to make changes as early as 2013, and if they didn’t, they would find themselves in this situation. So, like Evergrande, they are currently in a situation where they’re about to default on their financial obligations, either financial institutions domestically in China or offshore as well.”
What is Evergrande?
Businessman Hui Ka Yan founded Evergrande in 1996 and since then the company has owned over 1300 projects in more than 280 cities across China. Its businesses range from wealth management, to electric cars, and a significant slice in food and beverage manufacturing. It also owns one of China’s biggest football teams – Guangzhou FC.
Hui has a personal fortune of more than $10 billion, according to Forbes.
Poor market performance
The real-estate giant has been a poor performer for more than a year. Its share price settled at its lowest level in years.
Evergrande 5-day share report:
Evergrande YTD:
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Razak continues: “Evergrande is finding itself in a very similar situation to where Lehman Brothers were in 2008-2009, when we had the credit crunch crisis. You could draw some parallels to it and say that it’s going to drastically affect the market.
The biggest concern is that they are just the tip of the iceberg and there’s a bunch of other companies that are lining up, in a similar situation. When you’re dealing with such high leverage in such high debt, then you find yourself in a very risky situation, and I think that that’s what we’re seeing right now.
“If it’s just Evergrande and they default, that’s okay as life will go on. But if it’s an entire sector and this is much larger than what’s happening in China, then it could be catastrophic. It would hit the entire global financial system, so that is the greater concern about this story.”
Debt lifeline
The debt-laden Chinese real estate giant received a lifeline after the group’s main company it would make coupon payments to bond holders on Thursday.
Hengda Real Estate Group is set to make a coupon payment on onshore bonds after successful private negotiations with bondholders, reports Reuters.
Evergrande said it negotiated a deal with bondholders to settle interest payments on a domestic bond, curbing some of the chaos it unleashed this week.
Heavily intertwined with China’s economy with many assets in retail and infrastructure, Evergrande’s fate will drastically affect the country’s financial markets.
Evergrande sales decline
The developer said in a filing earlier in September that its property sales, declining since June 2021, will likely continue to post a ‘significant’ drop, dampening buyer confidence.
Evergrande said that it could default on its debts; the company holds about 6.5% of the total debt in China’s massive property sector.
Razak says: “This story is still developing and I think we’re only at the beginning of uncovering this mess. And this is on top of the pandemic and changing of the rules in Washington.
If it starts happening across sectors where these types of companies are over leveraged, that basically means that the price of the real estate that they are developing is inflated. That may bring the collapse of the real estate market that we’ve seen so inflated over the past year and a half.
“It might not just end in China. It might cross borders to the United States and into Europe and that would be really very traumatic to the financial markets.”
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