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Will the crisis in real estate giant Evergrande trigger China’s Lehman Brothers moment?

China's Evergrande crisis

The world is closely monitoring Chinese real estate major Evergrande Group’s moves. The real estate — a Fortune 500 company—is slated to make its interest payments this week. Will it manage— that is the billion-dollar question.

While the Evergrande debt crisis has led many to call it China’s “Lehman Bros moment” that had triggered the global financial meltdown in 2008, analysts said that a lot would depend on how the government deals with this problem.

In an effort to revive battered confidence in the firm, Evergrande Chairman Hui Ka Yuan said in a letter to employees that the company is confident it will "walk out of its darkest moment" and deliver property projects as pledged.

Also read: China's real estate crisis after Evergrande collapse reveals dangers of shadow banking

He also said Evergrande will fulfil responsibilities to property buyers, investors, partners and financial institutions even as the stocks of the company have crashed. 

There are fears that its $305 billion debt mountain could trigger widespread losses in China's financial system in case the company goes bankrupt.

“The world is already passing through a very fragile state post the Covid 19 pandemic and a shock in China, the second largest economy, would have a huge impact the world over,” an industry source told India Narrative.

Once one of the most revered companies, which even ventured into owning football teams and electric cars, it now owes over $300 billion. The Evergrande crisis has already triggered a massive real estate crisis in China.

The impact on the Chinese economy

China’s real estate sector has been a primary driver of growth and the country’s property market has been booming. 

According to the Evergrande website, the company has been generating more than 3.8 million jobs each year and has 200,000 employees. The Evergrande crisis, naturally, has made the Chinese authorities as well as the common people worried and has led to many comparing it with the Lehman Brothers crash.

Also read: Chinese real estate behemoth Evergrande crumbles revealing a larger real estate bubble

The real estate major has more than 1,300 projects going in more than 280 cities in China.The company, the website said, “is a forerunner in delivering all houses… to provide a new life of smart housing for more than 12 million proprietors.”

The Reserve Bank of Australia noted that in the 1990s, residential housing, which had formerly been controlled by the state in urban areas, was privatised. “This led to the creation of an active property market, an emerging market for mortgage credit and rapid housing price inflation,” it said.

China’s property market has also boomed in the last few years due to shadow banking. The Institute of Chinese Studies (ICS) revealed that China’s household debt in December last year was estimated at 150 per cent of its disposable income. This was also marked by a rise in property prices and seems to be concentrated among the millennials.

“There have been serious over-investments in several sectors in China, real estate being just one of the many. So, there are issues but since there is little transparency regarding data, it is difficult to assess the intensity of the problem,” Shakti Sinha, director, Atal Bihari Vajpayee Institute of Policy Research and International Studies, MS University told India Narrative earlier.

Why it is critical for global businesses, too?

The real estate sector has a cascading effect on other industries including steel and cement.

The tumbling of Evergrande has also showcased the problem of high and unsustainable debt that several Chinese firms may be getting caught in at this juncture when the world economy is going through testing times amid the Covid 19 pandemic and shifting geopolitical contours.

Also read: Sensex, Nifty swing amid global cues; fall sharply after rise

Not just that. The common homebuyers too are saddled with high debt.

A slump in demand in China would not only impact the country’s economy, it would have a far reaching effect on global businesses. The Evergrande situation has already led to a weakening of prices of metals.

Indian metal stocks have started to feel the heat. The BSE metal stocks weakened on Monday and analysts said that it could be worse if the Evergrande situation escalates.