Why China’s Evergrande crisis has sent global stock markets in panic mode

Stock markets around the world have been jittery from Monday as concerns keep growing over the possibility of massive defaults by one of the biggest Chinese real estate developers Evergrande Group.To get more China business news, you can visit shine news official website.

There are high chances that the embattled firm will default on upcoming payments later this week even as its chairman tried to lift confidence. Shares of the property developer plunged by as much as 7 per cent on Tuesday, following a 10 per cent drop a day ago.

The group’s shares have plunged nearly 80 per cent this year and already faced multiple downgrades by ratings agencies.

The property developer has two interest payment deadlines coming up -- one worth nearly $84 million on its bonds on Thursday and another worth over $47 million on September 29. It may be noted that both bonds would default if Evergrande fails to settle the interest payments within 30 days of scheduled payment dates.Analysts believe the company is likely to default unless it successfully negotiates a restructuring plan with banks. In fact, the company has also been unable to repay investors in the wealth management business.

While most stock markets in the world rebounded slightly on Tuesday, experts are worried about the impact the default would have on the global economy. Meanwhile, stock markets around the world continue to keep a close watch on the Evergrande crisis.

Evergrande Group is the world’s most indebted real estate developer with dues worth over $300 billion, including bank loans, short-term borrowings and supplier credit among others. The amount is equivalent to 2 per cent of China’s GDP and probably one of the biggest debt piles in the world.

It was once China’s top-selling property developer but tightening of lending rules by the country has made existence difficult for the debt-laden company. This is in stark contrast with its position a few years ago when it was part of the elite Fortune 500 companies.

There are fears now that the collapse of the company could have a serious impact on the country and the world, given the fact that China is the second-largest economy in the world. Worried investors have even termed the crisis as China’s very own “Lehman Brothers” moment.While global brokerages have downplayed the threat of Evergrande’s crisis, it could pose serious threats to China’s property market and economic instructions. A spillover effect, therefore, cannot be ruled out.

Like all major financial crises, Evergrande Group’s financial woes have not just popped up in a day but due to years of aggressive borrowing. The debt-fuelled growth has served the company well, helping it expand its business empire — to the extent that it owns China’s most popular football club, Guangzhou FC.

Evergrande Group was founded in 1996 by businessman Hui Ka Yan in 1996 in Guangzhou, located in southern China. It was formerly known as the Hengda Group.

Over the years, it has emerged as one of China’s top real estate developers with more than 1,300 projects spread across 280 cities. The group has also expanded to businesses like wealth management, electric cars, theme parks, bottled water, groceries and dairy products.

The company enjoyed rapid growth during the mid-2000s and the post-2009 global financial crisis, riding on the wave of surging property prices and high demand. However, property sales have slowed down significantly in China — a huge blow for the company that had a four per cent share of China’s total property sales.