The Evergrande Group, China’s second-largest real estate developer, has informed the country’s Housing Ministry that it will not be able to pay the interest on its loan before the Sept. 20 deadline, Bloomberg reported, sparking a greater concern about the company’s cash flow problems.
As the anger of homebuyers and investors continues to mount, Evergrande faces challenges securing the money it needs to make payments on its debt of over $ 300 billion. The company’s assets remain tied up in its existing properties, leaving it with insufficient funding to make payments and complete ongoing projects.
In recent years, the Chinese economy has continued to prosper and Evergrande has sought to capitalize on it by taking loan after loan to expand its size. Today, the company’s loans have caught up with it and Evergrande is now the most indebted real estate developer in the world.
If Evergrande were to succumb to its debts, its failure could wreak havoc on the international economy, potentially leading to a situation comparable to the bankruptcy of former US fourth bank Lehman Brothers, an event which played a role in triggering the 2008 financial crisis.
A true giant of the Chinese economy, Evergrande owns more than 1,300 properties in China and manages nearly 2,800 real estate projects, CNBC reported. The company is linked to several key industries in the country, including consumer products, electric vehicles, healthcare services and video production units. Its reach means that it indirectly creates more than 3.8 million jobs each year, according to its website. Directly, Evergrande employs 200,000 people.
Analysts have questioned whether China’s authoritarian government would allow the company to go bankrupt. CNBC analysts said the government would see its success as a necessity and choose to bail it out. However, Reuters reported that a Beijing bailout would be unlikely, and the country’s recent crackdown on its social media, video game and gambling industries indicates that it is a possibility.
If Evergrande crumbles under its own weight, Bloomberg said real estate development, which accounts for one-fifth to one-quarter of China’s economy, could slow over the next few years. This would lead to a drop in GDP, demand for raw materials and a decrease in the rate of inflation which would have an impact on the international economy.
Such an effect could lead to a drop in the average prices of Chinese goods and services, affecting a large part of the country’s citizens, including its manufacturing workers. China is the United States’ largest trading partner with key American sectors such as technology, consumer goods, and pharmaceutical industries dependent on Chinese manufacturing. If the fall of Evergrande wreaks Lehman Brothers-style havoc on the Chinese economy, the consequences will likely be felt in the United States and the rest of the world.