Debt-laden Chinese property developer Evergrande causes havoc on stock markets across the world
Global stock markets are on the verge of a crisis, as Chinese real estate firm Evergrande – the world’s most indebted real estate developer – announced that it is due to make interest payments of £61m on its bonds this Thursday.
Ahead of this announcement, Evergrande started to repay its investors in its wealth management business with property, after it was revealed that it does not have the funds to pay its liabilities.
The reason why Evergrande is currently struggling is that initially borrowed more than £217bn to fund its aggressive growth strategy, however, in 2020, the Chinese government brought in new regulations to evaluate the debt taken on by large property developers.
As a result, Evergrande had offered its properties at discounted rates in order to keep the company in business. However, the firm is now facing payments it cannot meet.
Ever since the rule change Evergrande’s share price has fallen by more than 80% this year, and there has been a serious knock-on impact on stock markets across the world.
Initially founded by entrepreneur Hui Ka Yan in 1996 in Guangzhou, Evergrande Real Estate currently owns more than 1,300 projects across China.
Impact on Chinese economy
The knock-on impact of Evergrande’s struggles are far-reaching.
Evergrande reportedly owes debts to more than 170 domestic banks and over 120 financial institutions, both in China and around the world.
If the firm defaults, lenders will be less likely to provide loans and funding, causing a credit crisis. This is where businesses cannot borrow at affordable rates of interest.
As one of the world’s leading economies – this will impact inward investment, international trade, and businesses that work in and with Chinese entities.
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown comments: “Concerns are mounting that problems are piling up in the Chinese economy due to the precariousness of Evergrande, the property conglomerate. Shares in the company have sunk yet again, and there are now fears that it defaults on its huge debts, there could be contagion, spreading right across the financial system. There may be pockets of recovery right now, as Covid restrictions ease, but it’s feared the global economy could now be hit by a fresh barrage of problems.”
Impact on the stock market
The S&P 500 fell by 2.9% on Monday – Wall Street’s biggest fall since May – although it did recover to a !.7% drop by the end of trading.
The NASDAQ fell by 2.2%.
The CBOE Volatility Index hit its highest peak since May.
More to follow.