Evergrande is in a tight spot, but there will be no “Lehman moment.”
With Evergrande’s future in doubt, global markets have plummeted on fears that one of China’s largest developers will go bankrupt, spreading a contagion throughout the world’s second largest economy and beyond.
Worried investors have been talking about a “Lehman moment” this week, as they try to figure out if the crisis is a repeat of the bankruptcy of Wall Street behemoth Lehman Brothers during the 2008 global financial crisis.
Evergrande has been on a buying spree for more than a decade, despite being primarily a developer. The company employs 200,000 people, has a presence in more than 280 locations, and claims to have indirectly generated 3.8 million Chinese employment.
It has purchased Guangzhou FC and converted it into a hugely profitable club, established the popular Evergrande Spring mineral water, and developed amusement parks that it claims are “larger” than Disney’s.
It also has a division dedicated to electric vehicles, as well as interests in tourism, digital operations, insurance, and health care.
That spending binge was funded by founder Xu Jiayin’s massive indebtedness. The company is currently owing more than $300 billion – equivalent to 2% of China’s GDP – and is having difficulty repaying it.
Last year, the government began to introduce a series of measures aimed at reining down property firms’ borrowing as part of a push to address a serious debt mountain built by the industry.
This has significantly limited its capacity to complete and sell properties in order to pay off its debts.
Banks have already given up hope of the company repaying its loans, but it is slated to make two bond payments on Thursday.
It is also not expected to fulfill those deadlines, and despite the fact that it has 30 days to accomplish them, it is largely predicted to default.
The government is the center of attention. The property sector is a critical engine of the Chinese economy, accounting for almost a quarter of GDP, and has been essential in the country’s post-pandemic recovery. Any bankruptcy of such a large corporation would have far-reaching consequences.
As a private corporation, though, Beijing may feel less compelled to prevent Evergrande from failing and may push it to file for bankruptcy, using it as a signal that no enterprise is too large to fail and that they cannot rely on the government to bail them out.
However, the majority of specialists agree that. Brief News from Washington Newsday.