News headlines over the past month have universally included mentions of Chinese developer Evergrande Group and its imminent downfall. The possibility of one of China’s biggest companies going under has put immense pressure on the financial markets, especially on Chinese stock indices. What’s more, investors have been worried about the effect spilling over, similar to the 2008 financial crisis which started in the United States.
The Evergrande Real Estate Group, up until recently, was considered the real estate developer with the highest market value in the world, and is China’s second largest company of this kind.
Though Evergrande Group has performed well as a developer in its more than two decades of operations, the company has expanded its business to other sectors such as theme parks and electric vehicles, among others. Not all of these ventures have been profitable, and most of them required a lot of capital to establish. Thus, Evergrande’s funds have been stretched too thin for too long.
This brings us to August 2021, when it first came to light that Evergrande is so low on cash that it will not be able to pay its monthly debt fees. Right now, the company owes more than 300 billion US dollars to lenders and investors.
The company currently has a credit rating of CCC/CCC+, depending on which rating agency one consults. It has been downgraded once or twice this year alone.
In the last six months its share value has gone from around 14 Hong Kong dollars down to 2.7-3 HKD. In annual terms, the company’s stock value has tanked about 85%.
Over the last two weeks, Evergrande missed several payments. It has triggered a 30-day grace period during which it still has time to look for funds to make good on its financial commitments before its default is official.
The Chinese government has issued measures to keep the housing market from collapsing, and the People’s Bank of China has kept stimulus flowing to stave off the crisis, but Evergrande has not hit rock bottom yet. Things might yet get worse.
