Why should I care if China property giant collapses?

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Getty Images A man and children cycle past the Guangzhou FC football stadium, which is being built by Evergrande.Getty Images

Before its debt crisis, Evergrande was building a new stadium for its football team, Guangzhou FC

Last September, its chairman was placed under police surveillance following earlier reports that other current and former executives at Chinese property giant Evergrande had also been detained.

What does Evergrande do?

Businessman Hui Ka Yan founded Evergrande, formerly known as the Hengda Group, in 1996 in Guangzhou, southern China.

The broader Evergrande Group encompasses far more than just real estate development.

Its businesses range from wealth management to making electric cars and food and drink manufacturing. It even owns a controlling stake in what was one of the country’s biggest football teams, Guangzhou FC.

Mr Hui was once Asia’s richest person with his fortune estimated at $42.5bn (£34.8bn) by Forbes, but his wealth has plummeted since then, largely as Evergrande’s problems have grown.

Why is Evergrande in trouble?

Evergrande expanded aggressively to become one of China’s biggest companies by borrowing more than $300bn.

In 2020, Beijing brought in new rules to control the amount owed by big real estate developers.

The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.

Now it is struggling to meet the interest payments on its debts.

This uncertainty has seen Evergrande’s shares lose 99% of their value in the past three years.

Why would it matter if Evergrande collapses?

There are several reasons why Evergrande’s problems are serious.

Firstly, many people bought property from Evergrande even before building work began. They have paid deposits and could potentially lose that money if it goes bust.

There are also the companies that do business with Evergrande. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.

The third is the potential impact on China’s financial system: if Evergrande collapses, banks and other lenders may be forced to lend less.

This could lead to what is known as a credit crunch, when companies struggle to borrow money at affordable rates.

A credit crunch would be very bad news for the world’s second largest economy, because companies that can’t borrow find it difficult to grow, and in some cases are unable to continue operating.

This may also unnerve foreign investors, who could see China as a less attractive place to put their money.

Is Evergrande ‘too big to fail’?

The very serious potential fallout of such a heavily indebted company collapsing has led some analysts to suggest that Beijing may step in to rescue the company.

However, Jackson Chan from financial markets research platform Bondsupermart does not think that will now happen.

“To be honest, Evergrande has already collapsed,” says Mr Chan, adding that he believes “it is on the brink of a forced liquidation”.

This could have a major effect on China’s economy as the property sector contributes roughly a quarter of its growth.

Mr Chan also suggests that the country could be following a similar path to Japan in the 1980s, when it slipped into decades of economic stagnation.

However, others think it is unlikely that Evergrande will be allowed to completely collapse.

“That could spiral, affecting other indebted companies and further hurt the overall property sector which is very important to the growth of the economy,” Dexter Roberts, director of China affairs at the Mansfield Center at the University of Montana, told the BBC.

“At the same time, many people whose household wealth is mainly in their apartments will also be badly hurt,” he added.

Mr Roberts, who spent more than two decades in China as a journalist, said “the old Evergrande no longer exists” and while the authorities may keep it afloat, “it will be as a radically diminished company.”

Reporting by Peter Hoskins and Mariko Oi

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