Massive Chinese Real Estate Company on Verge of Collapse

Evergrande facing major debt crisis . . . 

Giant Chinese real estate company Evergrande has admitted it is examining its financial options and is looking at restructuring its operations and debt as it risks defaulting on massive loans that could result in bankruptcy. Evergrande is China’s second largest property developer, boasting 150,000 employees and some 700 projects throughout China. Crippled by US$300 billion in debt and by its inability to sell assets to raise funds needed to pay lenders and suppliers, the company faces a significant cash-flow crunch that threatens its survival. Angry small retail investors gathered at the company’s headquarters in Shenzhen on Monday to demand the firm repay their deposits and investments. The company's shares plunged to a six-year low on Tuesday on the Stock Exchange of Hong Kong.

China’s overheating real estate market . . .

Residential real estate has grown significantly in China in recent decades, with many observers believing it has grown too fast, too quickly. Chinese consumers have seen the property market as a safe and reliable investment that delivers appreciating property values. While the real estate sector has been a major driver of economic growth in China, prices have risen significantly and rapidly, creating a potential real estate bubble and fuelling concerns over the sustainability of the country’s real estate market and the strength of its economic system. While Evergrande is not the first Chinese real estate company to face significant financial troubles, it would be the largest one to default in years, with significant consequences for Chinese homeowners and investors, as well as investors outside China.

A potential domino effect?

The fallout from the current crisis will likely take time to unfold, and it remains to be seen whether Beijing will intervene to save the company from collapse. There are growing fears that a default could have spillover effects to other industries and on global financial markets. Some analysts have made comparisons to the 2008 collapse of the U.S. investment bank Lehman Brothers that precipitated the Global Financial Crisis, while others have compared the Evergrande debacle to the Asian Financial Crisis of 1997. Still others have dismissed these claims, arguing that the most immediate concern is a real estate crash in China, which would see a plunge in home prices, millions of investors ruined, other large developers going bankrupt, and a crippling of a significant sector of China’s economy.