Evergrande, China’s second-largest real estate developer, is in a quagmire after accumulating nearly $300 billion in debt. Evergrande was touted by investors as ‘too big to fail’ but is now on its deathbed following huge debt accumulated over the last few years. Evergrande is one of the largest real estate developers in the world and has numerous interests in several sectors including the retail sector, the ride-hailing or taxi apps sector, and also the tech sector. Due to its numerous investments globally and owing to the fact that companies, employees, and millions across the world have invested with the company, its downfall could deal a huge blow to the global economy. Analysts say that like all companies, Evergrande is “not too big to fail.”
Not ‘Too Big to Fail’
The Evergrande Group is one of the biggest companies in China, and consequently one of the biggest in the world. It even owns a football team. Evergrande has for the longest time been seen as a company ‘too big to fail’ owing to its numerous investors and its sheer size. The company, however, found itself in a quagmire after investors came calling demanding they be repaid what they had invested, following concerns that the company was likely to go bankrupt. What led the company here is a mix of heavy borrowing and the poor utilization of investments.
As it were, Evergrande saw billions of dollars invested into the company, in a flood of investments, owing to the appreciation that China is now a major player in the investment sector and the belief that some of its biggest companies are failproof. Unfortunately, Evergrande’s current situation has not only impacted it as a company but has also put the Chinese government in a catch-22. Beijing is partly to blame for this conundrum, however, as its own strict financial regulations made it harder for Evergrande to acquire cash, lending, and investments.
To save face and to ensure that its economy is not negatively impacted by the downfall of Evergrande, China may choose to bail out the company and give it a lifeline. However, doing this would be tantamount to sending other companies wrong signals that they could go into heavy debt, utilize investments poorly, and be assured that Beijing would bail them out. As such, China has to grapple with the difficult choice of whether to let the company fail and see its economy negatively impacted or bail it out and risk the creation of a toxic culture of debt by its numerous companies. Analysts say that the Communist Government of China may choose to exercise its sweeping powers and compel other state-affiliated companies and businesses to bail out Evergrande, delegating the bailout to them. Mind you, this delegation would mean Beijing literally pressuring or demanding that these companies bail out Evergrande, whether they want to or not.
What Should the Chinese Government Do?
Analysts say that the best option for China is to cushion its economy against Evergrande’s downfall. They, however, say that a possible bailout of the company by Beijing could also mean a restructuring of the company’s leadership and how it does business. Evergrande on its part has denied that it is on the brink of bankruptcy and has given investors the option of payout via real estate i.e. a payout in kind. Investors are, however, bitter and angry, with some of them protesting at the company’s headquarters in Shenzhen, China demanding they be paid their money back. Evergrande is a sad story of the fallibility of huge corporations due to debt and bad governance. Companies the world over should cushion themselves from debt or borrowing too heavily without assurances of return on investment, ROI.
Incomplete Real Estate Developments and Unpaid Contractors
Numerous cities in China now have Evergrande’s real estate developments that are incomplete with numerous contractors remaining unpaid for work done. Many of Evergrande’s contractors have vowed not to continue work on unfinished projects until they receive payment. Beyond that, there are numerous retailers, including American ones, who invested in Evergrande and are facing the risk of possible default. Like the scandal of the Lehman Brothers responsible for the 2008 financial crisis, Evergrande could as well become the root of the 2021 financial crisis. Mind you, the world is yet to recover from the financial woes caused by the COVID-19 pandemic and a huge default by Evergrande could destabilize the Chinese economy, its financial sector, multiple supply chain partners, and consequently, the global economy. Evergrande’s stock price has since plummeted after the announcement of its financial difficulties as has global stocks and indexes including the Hang Sen Chinese index.
Officials from the Chinese government have been holding talks with Evergrande’s leadership and are set to come up with an amicable solution for both sides. The conundrum that Evergrande has put China in could mean other companies are coerced to bail it out of its debt, in conjunction with the Chinese government. All in all, Evergrande will remain a tell-tale of what could happen if companies go into huge debt without assurances and systems in place to ensure the said debt is well utilized or utilized in a way that will ensure sustainable ROI. For the banks, the biggest lenders of Evergrande, the scandal is another warning sign of the need for over-the-top auditing for big creditors.