Today’s global real estate market is buzzing about China’s Evergrande. It tells the tale of a real estate corporation that is heavily in debt, has a high level of financial leverage, has outgrown its ability to execute, has a multi-city footprint, operates in several industries, and where the promoters are merely postponing the inevitable. The Evergrande debt problem is severe enough to cause the Chinese economy to collapse and to heat up the entire world economy. People refer to it as the Lehman Brothers of China.
Even though Evergrande was in discussions with banks to restructure its loans earlier last month, rating agencies including Fitch and Moody’s Investors Services lowered the company’s credit rating to very high-level concerns.
Evergrande’s problems stoked worries that China’s residential and commercial real estate market, which powers up to a third of the second-largest economy in the world, would implode. The real estate firm has been frantically trying to raise money to pay lenders and suppliers as Chinese regulators have tightened the noose and prohibited the company from further borrowings to prevent a housing bubble.
Effects of The Evergrande Crisis
Even before construction started, numerous people purchased real estate from Evergrande. They have made deposits, and if it fails, they might lose that money. Additionally, there are the businesses that work with Evergrande. Businesses, such as construction and design firms and material suppliers, run the danger of suffering significant losses that could drive them into bankruptcy.
A credit constraint would prevent the company from borrowing money to expand further, which would discourage international investors from making investments in China. To fill the financial gaps, the business sold wealth management solutions to ordinary investors, raising billions of dollars.
Such a crisis can have catastrophic effects over the world economy, sending it into a cascade of uncertainty and a time to major recession.