Here’s an explanation from another forum on why this is a big deal:
Evergrande, a Chinese property developer and the most indebted corporation in the world, has defaulted on its debt after failing to make its interest payments on $1.2B of international loans. The payments were due a month ago, and grace periods lapsed Monday, December 6, 2021. This most recent development could have serious ripple effects that could have, not just a trickling, but an absolute downpour for the Chinese economy and the broader international financial landscape.
Evergrande has been selling assets in recent months to raise the money it owes to customers, investors and suppliers. The company had been scrambling for months to raise cash to repay lenders, and its billionaire founder, Xu Jiayin, has even been selling off personal assets to prop up its finances.
Credit ratings agency S&P, said earlier this week that “default looks inevitable for Evergrande” with repayments of $3.5 billion on US-dollar denominated bonds due in the coming months. In a statement last Friday the company said it could not guarantee “to perform its financial obligations”, sending its share price crashing. So far this year, the stock has lost 87% of its value.
There are several reasons why Evergrande’s problems are serious. Evergrande has about $300 billion in total liabilities, and analysts have worried for months about whether a default could trigger a wider crisis in China’s property market, hurting homeowners and the broader financial system. The US Federal Reserve warned last month that trouble in Chinese real estate could damage the global economy.
If Evergrande defaults, banks and other lenders may be forced to lend less. This could lead to what is known as a credit crunch, when companies struggle to borrow money at affordable rates. A credit crunch would be very bad news for the world’s second largest economy, because companies that can’t borrow find it difficult to grow, and in some cases are unable to continue operating. This may also unnerve foreign investors, who could see China as a less attractive place to put their money.
On a more microeconomic level, many people bought property from Evergrande, including prepaid deposits, even before building work began and they could potentially lose that money if Evergrande goes bust. There are also the companies that do business with Evergrande. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.
Evergrande Real Estate currently owns more than 1,300 projects in more than 280 cities across China. However, the broader Evergrande Group now encompasses far more than just real estate development. Its businesses range from wealth management, making electric cars and food and drink manufacturing. It even owns one of country’s biggest football teams – Guangzhou FC.
Evergrande expanded aggressively to become one of China’s biggest companies by borrowing more than $300B. However, in 2020, Beijing brought in new rules to control the amount owed by big real estate developers. The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.
Bill Masen - December 9, 2021
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