China's Evergrande crisis: A global financial crisis in the making

Written By: Sumit Chaturvedi WION
NEW DELHI Published: Sep 21, 2021, 06:15 PM(IST)

An exterior view of China Evergrande Centre in Hong Kong, China March 26, 2018. Photograph:( Reuters )

Story highlights

Evergrande has around $305 billion worth of liabilities, the largest by a property developer in the world. It’s a giant in Chinese dollar bond market as it accounts for about 16 per cent of outstanding notes.

It can be the biggest test of China’s financial system and on the checks and balances that are applied in world’s economic powerhouse. The Evergrande crisis is snowballing into a contagion that can roil the global economic recovery. 

Beginning of the crisis

The crisis started with China’s crackdown on real estate firms last year, putting a cap on the debt they can hold. Evergrande acted swiftly to bring down the $305 billion worth of debt, which was too much for the firm with a market cap of $50 billion, by selling off properties. This led to a further problem in the market, where the firm couldn’t find buyers even for its discounted properties. And despite that fire sale, the Evergrande hasn’t been able to generate enough cash to make interest payments on its high debts, giving rise to fears of default—much of which is coming due this Thursday. 

Debt bomb

Evergrande has around $305 billion worth of liabilities, the largest by a property developer in the world. It’s a giant in Chinese dollar bond market as it accounts for about 16 per cent of outstanding notes. The moment of truth will come this Thursday for the company that contributes to around 2 per cent of China's GDP. Interest worth $83.5 million on a five-year dollar bond are due and failure to pay within 30 days may constitute a default. 

China's Lehman crisis in the making?

The Evergrande liquidity crisis has been in months in the making, and its shares have plunged by 85 per cent since the beginning of the year. However, it is still too early to call the Evergrande crisis a repeat of the Lehman crisis of 2008, when the sub-prime mortgage crisis that started in US led to a global economic slowdown. Some analysts say that while the crisis is big, it is small compared to what happened in 2008. Also, the Chinese economy is big and, while Evergrande’s liabilities could be 2% of China's GDP, its contribution is relatively less for many other global economies and that the debt is not widely held by other countries or companies.

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