The existence of a world crisis brings its own trauma to the majority of people. Many panicked when they saw the signs. In September 2021, signs of a world crisis were very visible. Do not want to repeat the same mistake in navigating the crisis as before. People are starting to anticipate by looking at the data. The majority of people who are financially literate are preparing for the coming Evergrande Crisis. There are predictions that the Evergrande Crisis will be like the Lehman Brothers Crisis and some say the opposite. However, the world still remains optimistic that this crisis will be different from Lehman Brothers which resulted in the financial market crashing. Before discussing further about the Evergrande Crisis, GIC will start by explaining from the basics what the Evergrande Debt Crisis is.

What is Evergrande's debt crisis?

Evergrande is the second-largest real estate company in China. The company is struggling to pay creditors, and global markets are responding to this event with sell-off activity. At the moment, Evergrande's debt stands at $305 billion. The world community, especially those who are economically and financially literate, question the government bailout and whether Evergrande is actually too big to fail. With a debt of 305 billion dollars, Evergrande is the real estate company with the largest debt in the world. This debt makes Evergrande very famous with the stamp of a company that is on the verge of bankruptcy. The news of the state of the company has spread to the global market and sent the global market tumbling during Monday's trading, September 20, 2021. Evergrande's management has warned investors that the company it manages could default and rating agency Fitch said that a default appeared to be imminent. Moody's, meanwhile, said 'Evergrande is running out of money and time'. Xu Jiayin founded Hengda Group in 1996. Then, in the course of this company, it came to the point of changing its name to Evergrande. The company is headquartered in Shenzhen, China. The company's development was rapid during China's housing boom. Evergrande bought land and developed more than 1,300 luxury apartments in more than 280 cities across China. As housing sales have slowed in recent years, Evergrande's debt has risen and the company has diversified into other sectors such as electric vehicles, football and even water bottles. Evergrande employs 200,000 people directly and indirectly who are responsible for approximately 3.8 million jobs per year.

Chronology of Evergrande's Debt Crisis

Chinese government regulation of the property sector has stepped up as the government controls soaring house prices and excessive borrowing. In 2020, the Chinese government imposed 'three red lines' on certain developers to help curb debt levels, forcing them to deleverage. Three red lines require:
  1. 70% of the liability ceiling on assets (excluding the down payment proceeds from projects sold under the contract)
  2. 100% limit on net debt to equity
  3. The ratio of cash loans to short-term loans is at least one
This condition resulted in Evergrande failing to sell some of its businesses, as evidenced by a letter revealed from Evergrande to the Chinese government in September 2020 asking for help over the cash crisis it was facing, which sparked heightened investor concerns. An estimated two-thirds of Evergrande's bonds are on prepaid homeowners for nearly 1.4 million undeveloped residential properties. The government has also been working to control house prices, which could further impact developers' returns and their ability to pay their debts. Housing is the main source of household wealth in China and if the government succeeds in limiting the price of residential properties, existing mortgage holders could lose equity in their homes. Currently, household debt stands at 62% of China's GDP. Most of this debt is obtained through housing mortgages. This is one of the reasons for Evergrande's huge debt. The escalating regulations in China could also be a barrier to continuing foreign investment as seen recently when Blackstone scrapped plans to acquire SOHO China due to a prolonged regulatory review of the deal.

Impact on Financial Markets

In early 2018, China's central bank highlighted reports of its financial instability that companies such as Evergrande could pose systemic risks to the country's financial system. Evergrande has a large network of contractors and other businesses and businesses in the area that owe money from developers. In recent weeks, fears have increased as 128 banking institutions and 121 non-banking institutions were exposed to the Evergrande crisis. On Monday, the S&P 500 fell 2.24%, its worst day since May and the VIX, an index that measures S&P volatility, hit 26.7%, its highest jump since May. There were also concerns around the impact on commodities if demand eased due to slowing construction, with metal prices hitting during trading on Monday. Despite Evergrande's efforts to raise confidence, with its directors pledging to fulfill its responsibilities, the market is now counting on the Chinese government to stem the contagion of the crisis.

Prediction of Impact on the World Economy

While it's still unclear what will happen to Evergrande in the coming days, Evergrande's debt currently stands at $305 billion. Possible outcomes for Evergrande include bankruptcy, separation, purchase, or bailout by the government. What is clear is that the world needs to closely monitor asset prices and debt levels to maintain the health of the already fragile global economy.

Public Policies That Can Be Taken

As housing prices soar in other areas, the world can learn from China and past housing bubbles to prevent future crises. The World Economic Forum's Emerging Horizons in Real Estate: An Industry Initiative on Asset Price Dynamics report suggests several actions to help avoid future real estate asset bubbles: Market data: Regulatory authorities need to work with the real estate industry to provide robust and timely market analysis, data, and information, including data related to real estate development financing and investment.  by paying attention to the global and national initiatives that have been running. Transparency and understanding: National and international authorities should adopt targets to provide better transparency and understanding, broadly defined, across the real estate market and related markets for securities and derivatives. External policy impact: The real estate industry must engage in cooperation with governments and policymakers at the global, national and local levels on the impact of public policies on the real estate sector. Information clearing house ("hub"): A platform should be created to track and communicate significant new policies and the latest research to senior decision-makers in the real estate, banking and finance sectors, and to public sector policymakers to address areas such as derivatives market developments and global and national banking sector reforms. Emerging markets: Specific policy options are required by emerging market economies (EMEs); The World Economic Forum should provide a meeting platform to address specific issues arising from asset price volatility in EMEs. Thus the discussion on "Evergrande Crisis: Impact on the Economy and Financial Markets". Don't forget to check out other GIC articles about forex and finance only in the GIC Journal. Also make sure to check the opportunity to get additional money from GIC through Friday Barokah, and Affiliate.