The White House has said that the impact related to China's Evergrande debt crisis would be monitored by the department of treasury, news agency Reuters reported even as ratings agency Fitch downgraded the property developer to 'restricted default' status, saying they had defaulted on offshore bonds; Evergrande has not officially announced defaults.
The Evergrande situation is a concerning one. The ruling Chinese Communist Party can keep credit markets functioning but won't bail out Evergrande, which the central bank accused of borrowing recklessly. That would be the wrong signal at a time when Beijing is trying to force companies to reduce dangerously high debt loads. The central bank and bank regulator rushed to reassure the public that China's economy can be shielded from Evergrande's problems. They promised to keep lending markets functioning.
What is Evergrande, and what is its impact?
Evergrande Group, founded in 1996, is one of China's biggest builders of apartments, office towers and shopping malls. The company says it has more than 2,00,000 employees and supports 3.8 million jobs in construction and other industries. Evergrande says it has 1,300 projects in 280 cities and assets worth 2.3 trillion yuan ($350 billion). Evergrande's founder, Xu Jiayin, was China's richest entrepreneur in 2017 with a net worth of $43 billion, according to the Hurun Report, which follows China's wealthy.
He tumbled down the list as internet industries boomed but still ranked as China's richest real estate developer last year. He also topped Hurun's 2020 list of philanthropists, giving away an estimated 2.8 billion yuan ($420 million). Evergrande has branched out into electric vehicles, theme park development, health clinics, mineral water and other businesses.
Evergrande's Hong Kong-traded shares have fallen 90 per cent this year. Its bonds trade at a 75 per cent discount to face value. Xu built Evergrande on borrowed money. The company says it owes 2 trillion yuan ($310 billion) to bondholders, banks, construction contractors and other creditors. In June it said it owed 240 billion yuan ($37.3 billion) of that within a year, nearly triple the company's 86.8 billion yuan ($13.5 billion) in cash holdings.
Evergrande reported a $1.4 billion first-half profit but says sales weakened because news of its cash crunch made buyers nervous.
Economists have been warning China's rising debt is a threat for more than a decade. Reducing financial risk has been a ruling party priority since 2018. But, total corporate, government and household borrowing rose to the equivalent of nearly 300per cent of annual economic output last year unusually high for a middle-income country.
News reports indicate Evergrande borrowed everywhere it could, including by requiring employees of its construction contractors to buy its debt. The central bank, in unusually stinging comments, said Friday its problems were due to poor management and blind expansion.
-Inputs from agencies