Today, Evergrande is the most indebted real estate developer on the globe. It is on the verge of collapsing. Investors are distressed that its effect will spread to other markets as well. The Evergrande crisis began when the Chinese government decided to slash the amount of debts companies could take. Due to the resulting capital crunch, Evergrande had to suspend construction and also delay payments to suppliers.
The property giant is also into theme parks, electric automobiles, wealth management, and more. It is sitting with an overall debt of $90 billion and another $300 billion in liabilities and is likely to default on its dues. Several customers and business partners who have invested several hundreds of dollars for their homes feel doomed. Investors of Evegrande are clueless about their principals and suppliers of their payments.
The question now is whether the Chinese government will help. But so far, it has not shown interest to step in and might let Evergrande fail.
Is the Evergrande Crisis creating a ripple effect?
“We believe the Chinese banking sector can digest an Evergrande default with no significant disruption, although we will be mindful of potential knock-on effects,” credit analyst Ryan Tsang of S&P Global said in a report. The Swiss investment bank UBS depicts that Evergrande’s liabilities involve more than 130 banks and 120 non-banking institutions. The real estate developer also hires 4 million people every year for project developments. This has led to increased concerns for investors around financial stability risks in China.
As far as the ripple effect is concerned, the world is seeing drastic changes in the markets. Hong Kong’s Hang Seng Index fell 3.3%, while its properties index fell a massive 6.69% and hit a 52-week low. Along with this, the US stocks also witnessed the biggest drop since May. This is partly because of the Evergrande crisis. The spillover didn’t spare even the world’s largest cryptocurrency – Bitcoin. It sank to a massive $40,468.
The future of China’s real estate market
So what will be the future of China’s real estate market? Well, one thing that the country is focusing on currently is to cool off its property market and reduce its importance to the overall economy. The real estate industry may see a grim road ahead due to the decline in housing demand and the changing demographics of China.
According to an economist, Mark Williams, “The root of Evergrande’s troubles — and those of other highly-leveraged developers — is that residential property demand in China is entering an era of sustained decline.”
Around 60 to 65 million units of Evergrande are vacant representing. This is more than 21% of all homes in urban China. If there is a default, it will lead to a selling frenzy in the real estate market and push the prices down. And a deep price cut would impact consumption in China. Also, the total debt of China is $92 trillion and the debt to GDP ratio is 353%. That is, the GDP to debt ratio is currently quite high. A slowdown due to the property giant’s default will put China in a tough spot.
The current dip in the stock markets seems worse even though stocks have performed well recently. In the world of investing occasional downfall is a part of the bargain. Forbes points out in an article that it is a good deal for long-term investors. Between 2019 and 2021, the world has witnessed the global pandemic and Chinese/American trade war. Yet, the stocks have performed better than expected. The S&P 500 gained 29% in 2019, 16% in 2020, and 18% so far in 2021.
If you ask, is it time to sell? Maybe you should wait and watch.