Chinese real estate developer Evergrande has missed another deadline to pay off his investors, and already Fitch Ratings has received a rating that is considered a lobby. The company, which ranks second on China’s list of largest real estate developers, has also been declared close to bankruptcy. The harassment of Chinese companies, swelled to a huge extent, can be felt all over the world economy.

Until this fall, only real estate retailers around the world knew the name Evergrande, but for the second time in three months, we can worry that the company’s decline will not trigger a domino effect like the 2008 crisis. When the company first made headlines, many journalists confused it as Ever Given, which blocked the Suez Canal, but now it is likely to cause more confusion in the world economy than it did in the spring.

Simply put, China’s former second-largest real estate development company could go bankrupt, fearing that if it did, it would drag some of China’s economy with it, and the entire world economy could be in trouble. No one is failing to shake up the second largest economy as the whole world comes out of the economic shock caused by the epidemic. So this event is important for countries far away from China. And, of course, investors may be nervous, because there are still vivid memories of thirteen years ago, when the Lehman Brothers bankruptcy crisis began in the same way.

Already on October 21st, they were walking head over heels in front of one of Evergrande’s Beijing developments.

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The problems surrounding Evergrande are not new, and can be traced back to China’s booming history. The success of the Cantonese company, the legal forerunner of the company, was based on the excellent political relations of the founder Xu Jia and the great demand for residential real estate in Chinese society. Following the growth there was a huge expansion: the company acquired a football team, an insurance company, a media company, etc., but tasted the food supply. In recent years, the Evergrande has also shifted to the production of vehicles after charging stations for electric transport. The need for real estate provided a solid foundation for all of this, thanks to which in 2017 the founder was considered the richest man in China. However, as the company continues to swell, demand has already dwindled.

This did not help the fact that the construction of the necklace was largely funded by developers’ debt, and Evergrande was indebted to short-term bonds. In addition, a significant portion of debt is derived from the so-called shadow banking system: in the first half of 2020, according to Economist analysis, such open and similar short-term lenders accounted for 45 percent of Evergrande’s debt.

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There are three red lines to the Evergrande slope
In China, real estate became one of the most important investment assets in mid-2010, with the construction and real estate sectors accounting for 29 percent of the country’s economy, and real estate prices in major Chinese cities were higher than in New York. Or London. However, large investments were often financed by loans, but many real estate projects and one-size-fits-all policies produced the largest surplus. For this reason, President Jin King-Ping announced in 2020 that the balances of large real estate companies should be healthy. New rules For three red lines The debt ratio could not reach 70% of assets, net debt was equity and short-term debt was cash – Evergrande did not meet any requirements and therefore could not take out new debt. Because of this, he got into trouble and was forced to get cash quickly by selling his home shares in lieu of debt, but this could only come together at a depressing price.

Problems For the first time in September of this year they became a real threat. At the time, company executives announced that Chinese owners could pay the current interest rate on their bonds maturing in 2025, but did not guarantee that they would be able to send a total of $ 83.5 million to foreign investors. The company’s debt at the time was $ 310 billion, equivalent to two years of Hungary’s GDP, so it is understandable that many were nervous about the news.

Then more Bankruptcy avoidedThereby promising markets, but the period of inactivity does not last forever. He owed the company $ 82.5 million in interest on November 6, and when that failed, the company was given a 30-day reprieve. There is no news so far that the payment has been made as it is currently due to expire on Monday.

A strange situation arose in which it was not yet officially known what was going on: Evergrande did not comment on the events, did not yet state in its official communications that it had gone bankrupt, or was able to pay the money on time. The BBC And this Reuters It was also known that investors did not receive their money.

Everyone was eagerly awaiting what would happen, and finally Fitch Ratings broke the silence and announced that they would downgrade Evergrande to the second worst RD position since their questions were not answered by the Chinese. It is an acronym for Restricted Default, which translates to Hungarian as Prohibited Bankruptcy.

It is offered to those who are unable to repay their debts, who have not had the opportunity to repay, but who have not yet formally filed for bankruptcy or liquidation.

Below this, only really bankrupt companies, states, and other companies are on the rankings.

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If that’s not enough: With the collapse of Evergrande, the Kaisa Group could take second place in the list of Chinese real estate developers – shortly before it collapsed, Fitch added the company to the RD category. . The company was unable to repay $ 400 million on time. Leaders there tried to negotiate in November to issue new bonds to maturers in 2023, instead of the amount due in December, but so far no agreement has been reached.

More flags are flying in front of Kaisa’s Beijing office building

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It may be everyone’s luck that potential failure is predictable for both companies.

If you can calculate that the problem is huge, it is a degree better than the accident came almost to nothing.

Heads of state will not break themselves to rescue companies in trouble. At the very least, there is no question of the government borrowing or helping with big discounts – this is a clear message to other companies in the country: if someone borrows too much, they take the risk themselves. The task may be to save the damage, for example, the Central Bank of China said last Friday that the economy could pose a risk to other players, but was responsible for the “poor management” and “uncontrolled growth” of real developers. The head of Guangdong province sets up a committee to find out how Evergrande can return to normal operation – only two of its seven members can be represented by the problem organization.

A Bloombergnek However, foreign investors declare that they can only stand at the end of the queue among those waiting for their money. The main goal of Chinese government leaders is to maintain social stability, so it is safe to plan that homebuyers, employees of companies, and then domestic investors will receive the money they owe first.




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