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Explained: Is the Evergrande Crisis China’s Lehman Moment?

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Monday’s global markets rout, including a brutal slide in benchmarks in India, was triggered by two events.

A, a worsening fund crisis in Evergrande, the largest and most indebted developer in China, which could lead to a regulatory crackdown on the country’s real estate sector. Some fear it could escalate into global financial contagion.

Second, US Treasury Secretary Janet Yellen’s warning of an “economic catastrophe” if US lawmakers fail to raise the debt ceiling imposed by law, as well as concerns that the President of US Federal Reserve Bank Jerome Powell would likely flesh out plans to cut central bank bond purchases after the Federal Open Market Committee meets on Wednesday.

What is the crisis in Evergrande?

Evergrande, a company that started in 1996 selling bottled water followed by a stint in pig farming, now owns China’s top professional football team (Guangzhou Football Club, run by former defender Real Madrid central Fabio Cannavaro), and has long been the poster child. of the Chinese real estate boom. It took advantage of a sustained surge in house prices in China – the main driver of post-pandemic Chinese economic expansion – to expand into more than 250 Chinese cities selling homeownership dreams in the country’s middle class.

In a square in the city of Evergrande in Beijing, Wednesday, September 15, 2021 (AP Photo / Andy Wong)

What’s wrong ?

There were two immediate triggers that precipitated the crisis in Evergrande. Chinese regulators, as part of a widespread crackdown on sectors such as the digital economy and education, have launched investigations into high borrowing by real estate developers. To counter this, Evergrande tried to sell part of its business. But a gradual slowdown in the Chinese real estate market and waning demand for new homes have reduced cash flow. The two factors combined to precipitate the liquidity squeeze in Evergrande.

The company is now grappling with a $ 300 billion debt burden that has decimated its credit rating and stock prices. He is faced with nearly 800 unfinished residential buildings, numerous unpaid vendors and over a million home buyers who have partially paid for their properties.

Does the Evergrande crisis trigger systemic risks?

There are two factors here. First, China has been instrumental in the post-pandemic global economic recovery, having been the first to control the spread of the Covid-19 virus and ignore the impact of lockdowns in the first quarter of 2020, thus becoming the key driving force behind the global rise in raw materials.

Second, China’s protracted housing boom that began in the mid-1990s has now ensured that nearly three-quarters of the country’s household wealth is locked in housing. An impending collapse of the world’s largest real estate company could have a serious ripple effect on the entire economy, dampen growth and potentially trigger a cascading impact that could ignite global commodity and capital markets.

There are also concerns over Huarong, a Chinese state-owned financial conglomerate with liabilities of nearly $ 240 billion. Huarong is also said to be in trouble, raising the perception of a wider systemic crisis in China. But there are also indications that the Chinese Communist Party is likely to put its full weight behind a support mechanism to ensure that the crisis at these two companies does not escalate.

Evergrande crisis: what was the impact on markets and global wealth?

Monday’s massive sell-off was fairly widespread, with key Asia-Pacific and Europe indices collapsing sharply. The global stock market rout also hit the world’s fortunes, with the richest 500 people losing a total of $ 135 billion, Bloomberg reported.

Tesla Inc’s Elon Musk’s net worth fell from $ 7.2 billion to $ 198 billion on Monday, according to the Bloomberg Billionaires Index, with Seattle-based Amazon.com founder Jeff Bezos losing $ 5.6 billion, reducing his fortune to $ 194.2 billion.

Evergrande founder and chairman Hui Ka Yan has fallen sharply in Bloomberg’s wealth rankings, his fortune rising to $ 7.3 billion from a high of $ 42 billion in 2017.

On the Indian stock markets, the metals segment, which has risen sharply since the start of the year and which seemed to show signs of overheating, abruptly tanked On Monday.

Analysts see this more as a short-term correction, but there could be a lingering impact if the crisis in China were to remain unresolved.

India’s sustained iron ore exports, much of which is headed to China, could also have an impact if the dual crisis in China triggers a prolonged slowdown in the Chinese real estate market.

And there could be a lasting impact on global growth prospects, hampering the nascent recovery underway in markets like India.

The Fed’s declining action is seen as another headwind that could have an additional impact on sentiment, although much of that has already been factored in.

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