Why should I worry if the Chinese real estate firm Evergrande fails?

 Why should I worry if the Chinese real estate firm Evergrande fails?

The most indebted firm in the world is currently experiencing a situation that has gotten worse since police placed the chairman under watch.

It comes after earlier rumors that other current and former officials from the massive Chinese real estate company Evergrande had also been detained.

On Thursday, Evergrande stopped trading its shares in Hong Kong until further notice.

It represents a new low for the company, which was already in default in 2021 after missing a major payment deadline that led to the current real estate market collapse in China.

What is Evergrande's mission?

Evergrande, previously the Hengda Group, was established in Guangzhou, southern China, by businessman Hui Ka Yan in 1996.

Evergrande Real Estate presently has more than 1,300 projects in more than 280 locations around China, according to the business' website.

Real estate development is simply one aspect of the larger Evergrande Group.

Its businesses include anything from financial management to the production of electric cars and food and beverages. Even the former top football team in the nation, Guangzhou FC, is controlled by it.

Forbes assessed Mr. Hui's fortune to be $42.5 billion (£34.8 billion) at one point, but since then, his wealth has fallen precipitously, partly as a result of the worsening Evergrande issues.

What caused Evergrande's problems?

By taking on more than $300 billion in debt, Evergrande aggressively developed to become one of China's largest businesses.

Beijing implemented new regulations in 2020 to limit the amount that major real estate developers owe.

In order to ensure that enough money was pouring in to sustain the firm, Evergrande used the new measures to offer its properties at steep discounts.

It currently finds it difficult to make debt interest payments.

Evergrande's shares have lost more than 99% of their value over the last three years as a result of this uncertainty.

As it worked on a multibillion dollar agreement with creditors, the company filed for bankruptcy in New York in August in an effort to protect its US assets.

Why would it be important if Evergrande failed?

Evergrande's issues are critical for a number of reasons.

First of all, many people purchased real estate from Evergrande even before construction started. If it fails, they can lose the money they have paid in deposits.

There are furthermore the businesses that transact with Evergrande. Construction and design companies, as well as suppliers of materials, are at risk of suffering significant losses that could drive them into bankruptcy.

The third is the possible effect on China's financial system: In the event that Evergrande fails, banks and other lenders would be compelled to reduce their lending.

This could result in a credit crunch, in which businesses find it difficult to obtain loans at reasonable rates.

The second-largest economy in the world would suffer greatly from a credit crunch because businesses that cannot borrow find it impossible to expand and, in some cases, are unable to continue operations.

Foreign investors can become uneasy as a result and think twice about investing in China.

'Too big to fail,' is Evergrande?

Some observers have hypothesized that Beijing would intervene given the potentially very terrible ramifications of such a heavily indebted corporation falling.

According to Mattie Bekink of The Economist Intelligence Unit, "we think the federal government will probably find methods to ensure Evergrande's core business continues" rather than taking the chance of upsetting supply chains and upsetting homeowners.

Others, however, are unsure.

The prominent editor-in-chief of the state-owned Global Times newspaper, Hu Xijin, stated in a post on China's chat app and social networking sites platform WeChat that Evergrande ought to not depend on a government bailout and rather instead save itself.

This fits in with Beijing's desire to reduce corporate debt, so a high-profile bailout might be seen as providing a poor example.