Below are Views On Dragon nation gets stuck in crisis; spreads fears of contagion worldwide by Heena Naik, Research Analyst - Currency, Angel One Ltd
At present, the global markets are going through a lot of volatile swings owing to the liquidity crisis faced by China’s largest property developer ‘Evergrande’ which could slam the banking system and bleed into the foreign financial centers.So what basically is the crisis all about? Evergrande is the largest ever real estate company based out of China with presence not limited to real estate. The company is also into wealth management, electric cars, online media and healthcare. In a bid to grow aggressively and become China’s biggest company, Evergrande borrowed more than $300bn and stated selling residential units (more than 1.5 million) to people which were not completed yet. With its sprawling business, the conglomerate had a ballooning debt problem.
Then came the disastrous time when the Chinese government bought in new rules to control the amount owed by big real estate developers. This is when the company was posed for a downfall. To keep its business going, Evergrande stated to offer its properties at major discounts to ensure money was coming in. In the recent times, the company is struggling to meet the interest payments on its debts and has raised concerns that it will be unable to repay investors which has perplexed the markets already.
This incident bought the company into radar by most of the top notch credit rating agencies that downgraded Evergrande’s bonds over concerns onmoney repayment. In fact, it has also been reports in one of the agencies reports that the company's debt problems could pose widespread risks to the financial system of the world's second-largest economy. Currently, the company is due for interest payment of around $300 billion starting this week.
What if the company defaults on the payments? In terms of the consumers, people who purchased the incomplete property from Evergrande could lose that money if it goes bust. Then there are firms who were doing business with Evergrande to be at risk of incurring major losses. Lastly, China's financial system shall have a disastrous impact as the company owes money to around 171 domestic banks and 121 other financial firms. This could lead to a credit crunch which is a bad news for the Chinese economy. Moreover, all of these factors could prompt the foreign investors to refrain from investing in Chinese assets.
For Asian investors, the potential fallout from troubles at China Evergrande is currently the biggest source of worry. The fear of default has led to a global sell off causing volatility across asset classes. The CBOE Volatility Index, a measure of fear of U.S. equity investors, reached its highest level in four months’ on 20th Sep’21. On the other hand, the offshore Chinese yuan surged in Asia after having fallen to its worst level in almost a month.
With respect to Indian markets, both Sensex and Nifty were seen trading in red. Investors are also cautious since many stocks are over-valued which are vulnerable to corrections. If Evergrande happens to default, there will be a lot of redemption seen. To repay them, the company may sell off its investments made in other countries like India, Singapore etc. This shall affect all the markets as all of them are inter-linked one way or the other. The only saving grace for Evergrande for now is the Chinese authorities who will try hard to defend the country’s biggest real-estate player. Market are anxiously waiting for the Beijing’s response with hopes that the situation shall be bought under control after going through pandemic-led trauma.
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