Have you read seen the name Evergrande in different newspaper articles recently? Have you read the name and somehow seen it connected to financial trouble and causing financial markets to decrease in value? What is Evergrande all about? How can a Chinese company like Evergrande actually influence the international economy? In this short article, we will try to answer these questions in a very easily understandable way!
Evergrande started as a Real Estate company, and that is still the main profile of the company. But, they also make electric cars, they own a football team, and they deal with wealth management. It has grown rapidly, and it has turned into one of the biggest companies in China.
But, there is a problem with the way Evergrande and many other companies have been working. What is the problem?
It has been said that “Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms.” In other words, to experience rapid growth, they have borrowed money from all sorts of banks and financial companies. They are also receiving payment for different projects they have been working on and from those wanting to buy apartments before the work has been finished. But, due to pressure also from the Chinese government, it has been expected that Evergrande and other similar companies should get better order and stability in their economy. This has led to pressure from contractors who want to get paid, banks who want to get paid, financial companies who want to get their money, and house owners who want to get their houses and flats. All in all, a giant pressure has been laid on Evergrande, and they do not have the money to meet all those requests (just as workers also want to get paid for their work). They have tried to hand out properties as payment to companies and employees, but this isn’t enough to fix their problems.
Now, do you see the snowball effect coming? Evergrande cannot pay the banks. The banks cannot give out money to others, because they haven’t received the money they expected to get from Evergrande. It is just growing and growing. And because of this, both the Chinese economy and international economy can be heavily influenced by the actions of Evergrande in China.
It can almost be compared to when everyone in a country suddenly realizes that they want to cash out the money they have in the bank. What is the problem? The bank doesn’t have that kind of money, because even though you deposit $1000 to the local bank, they use that money to help a third person’s loan request. In that way, the bank is spending your money. It wouldn’t be a problem if only you went to cash out your deposit. But, when a big community suddenly goes to the bank to withdraw their money at the same time, both you and the bank will quickly discover that a problem is on the horizon. A few years ago, during a financial crisis in Greece, the banks set an upper limit to how much people could cash out from the bank, simply because they didn’t have enough money available to let everyone cash out all the money they wanted to withdraw.
What will happen to Evergrande? Will it cause a real crisis?
Evergrande doesn’t have the money to pay for all their bills. If they would go bankrupt, it would for sure cause a crisis that would influence markets in a grandiose way. But, will the Chinese government let that happen, or will they somehow intermediate and “fix” the problem? That is the question at hand, and only time will show the results.