Debt Crisis Looms for Evergrande

Evergrande has been China’s leading real estate developer in the 21st century (Wikimedia Commons). 

China’s most powerful real estate developer, Evergrande, faces a debt of $300 million. With the potential for Evergrande defaulting on its debt, many fear that the company might declare bankruptcy, an action that could have massive reverberations throughout China’s economy. 

Evergrande’s debt crisis has gained traction because its real estate holds a 29 percent share in China’s GDP. Founded in 1996 by Xu Jiayin, Evergande was initially a simple real estate development company. But after a period of enormous growth, the company has nearly 200,000 people working under it today, with more than 4 million workers hired as subcontractors annually. Not only does Evergande have a real estate monopoly with 1,300 projects in nearly 280 cities across China but has also expanded its enterprises to electric vehicles, theme parks, food and beverage businesses, soccer teams, and stadiums. 

Evergrande’s poor management of funds has led to its monumental debt and its shares being halted on the Hong Kong Stock Exchange. Evergrande's debts soared when the company decided to borrow overwhelming amounts to fund its other projects. They also sold real estate property such as apartments at a higher pace even with low margins with the idea that they could generate more cash and once again purchase land. Their inability to follow through with this financial model has forced the company to scramble to pay suppliers and investors. 

Without the involvement of the Chinese government, it is unlikely that Evergrande will be able to restructure its debt and protect itself from a financial collapse. In that case, the impact of this financial crisis will be felt by banks, suppliers, investors, and home-buyers. 

While Evergrande has not officially defaulted, international markets have readily expected their debt failure; in the past few days, essential markets including the S&P Index, the Nasdaq, Japan's Nikkei 225, and Australia's ASX have fallen in anticipation.