Why Evergrande Group Affecting the Global Markets?
What is Evergrande?
Evergrande was founded in 1996 in Guangzhou, China. Evergrande is one of the largest real estate property development companies in China. They specialize in building shopping malls, commercial real estate, building and selling residential apartments. The company snowballed and established businesses in different sectors like theme parks and manufacturing electric vehicles. But the company's source of revenue is still in property development. Evergrande owns more than 1,300 properties in more than 280 cities in China. They also employ 200,000 people in total, and the projects they build create more than 3.8 million jobs per year. This is why some think that it has "too big to fail" status. In total, the company has $350 billion in assets.
What is the issue, and why is it impacting global stock markets?
Evergrande's rapid growth is due to borrowing money. Property development companies use debt to finance their projects. So every project they start, they use the bank's money to fund it. The commercial housing market in China did not exist before 1990. Still, because of the economic growth in China, the demand for housing increased, which Evergrande took advantage of. Since the housing prices have been rising rapidly since 1990, the Chinese government was trying to find a way to restrain the demand for housing and the increase of housing prices. They tried different ways to do so but failed, which Evergrande thought was gonna happen again. While some other property development companies decided to scale down their operations, Evergrande was still charging ahead. But recently, a change in government policies reduced the demand for residential apartments, so Evergrande was having trouble selling apartments fast enough to meet their debt obligations. So now that China's demand for housing is decreasing, the revenue of Evergrande is falling. Now they can't pay their debt which puts them in trouble of defaulting on their $300 billion in liabilities. The global markets are affected because the news of them defaulting is unclear, and unsure if it's actually happening. So investors and traders are just scared or cautious about how Evergrande filing bankruptcy will affect the market.