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The most indebted corporation in the world is currently experiencing a crisis that has gotten worse following rumors that the chairman is being watched by the authorities.
It comes after earlier rumors that other current and former officials from the massive Chinese real estate company Evergrande had also been detained.
On Thursday, Evergrande stopped the trade of its shares in Hong Kong.
It represents a new low for the company, which was already in default in 2021 after missing a major payment deadline that led to the current real estate market collapse in China.
What is Evergrande’s mission?
Evergrande, previously the Hengda Group, was established in Guangzhou, southern China, by businessman Hui Ka Yan in 1996.
Currently, Evergrande Real Estate owns more than 1,300 projects spread over more than 280 Chinese cities.
Real estate development is now only a small part of the larger Evergrande Group.
Its businesses include anything from financial management to the production of electric cars and food and beverages. Guangzhou FC, one of the biggest football teams in the nation, is even owned by it.
According to Forbes, Mr. Hui was previously the richest person in Asia, with an estimated 2019 net worth of $36.2 billion. But since then, his wealth has drastically decreased; his current net worth is $3.2 billion (£2.6 billion).
What caused Evergrande’s problems?
By taking on more than $300 billion in debt, Evergrande aggressively developed to become one of China’s largest businesses.
Beijing implemented new regulations in 2020 to limit the amount that major real estate developers owe.
In order to ensure that enough money was pouring in to sustain the firm, Evergrande used the new measures to offer its properties at steep discounts.
It currently finds it difficult to make debt interest payments.
Evergrande’s shares have lost more than 99% of their value over the last three years as a result of this uncertainty.
As it worked on a multibillion dollar agreement with creditors, the company filed for bankruptcy in New York in August in an effort to protect its US assets.
Why would it be important if Evergrande failed?
Evergrande’s issues are critical for a number of reasons.
First of all, many people purchased real estate from Evergrande even before construction started. If it fails, they can lose the money they have paid in deposits.
There are furthermore the businesses that transact with Evergrande. Construction and design companies, as well as suppliers of materials, are at risk of suffering significant losses that could drive them into bankruptcy.
Thirdly, if Evergrande defaults, banks and other lenders would be compelled to reduce their lending. This might have an effect on China’s financial system.
This could result in a credit crunch, in which businesses find it difficult to obtain loans at reasonable rates.
The second-largest economy in the world would suffer greatly from a credit crunch because businesses that cannot borrow find it impossible to expand and, in some cases, are unable to continue operations.
Foreign investors can become uneasy as a result and think twice about investing in China.
‘Too big to fail,’ is Evergrande?
Some observers have hypothesized that Beijing would intervene given the potentially very terrible ramifications of such a heavily indebted corporation falling.
According to Mattie Bekink of The Economist Intelligence Unit, “we think the government will probably find a way to ensure Evergrande’s core business survives” rather than taking the chance of upsetting supply chains and upsetting homeowners.
Others, however, are unsure.
The prominent editor-in-chief of the state-owned Global Times newspaper, Hu Xijin, stated in a post on China’s chat app and social media platform WeChat that Evergrande should not rely on a government bailout and rather instead save itself.
This fits in with Beijing’s desire to reduce corporate debt, so a high-profile bailout might be seen as providing a poor example.