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Current Affairs

Evergrande crisis

Date: 22 September 2021 Tags: World Economy

Issue

Global markets witnessed a sharp slide due to financial crisis at Evergrande real-estate company of China.

 

Background

Evergrande is biggest as well as most indebted real-estate company of China. It is expected that the situation may turn into a global financial crisis.

 

Details

There is an expectation that Chinese authorities may undertake a regulatory crackdown on the country’s real estate sector. 

 

The rise of Evergrande

  • Evergrande has been the poster boy of the Chinese real estate boom. It started out in 1996 selling bottled water followed by venturing into big farming.

  • The company cashed on the demand for new homes to expand its operations. It was the main reason behind the post-pandemic Chinese economic expansion.

 

The problems

  • The investigations into digital business by Chinese authorities also started the probes into the high borrowings of property developers. 

  • The company tried to sell some of its business. Due to slowing down of demand in the housing sector, the company is now facing cash crunch.

  • The company owes around $300 billion to the market. Its credit ratings have gone down and share prices have fallen.

  • Due to the problems, about 800 projects have been stopped. Many suppliers are waiting payment. Customers are waiting for completion of their homes.

 

Triggering of global crisis

  • China has been the major driver of global economic recovery. Slowdown in the market will have global repercussions.

  • The entire economy of the country may be affected if real estate sector collapses. This is because three quarters of the country’s household wealth is locked up in housing sector.

  • Apart from Evergrande, state-owned financial conglomerate Huarong is facing debts of $240 billion. This may be an indication of overall situation in the economy.

 

Effects on India

  • China is one of the largest destinations for Indian iron ore. Collapse of real-estate could reduce the demand for the commodity. Mining companies may also collapse.

  • Apart from India, global companies also saw a fall in their fortune. The richest 500 people lost a combined $135 billion.