China has ability to address Evergrande situation, still risks remai
Evergrande Real Estate Group is China’s second-largest developer of property in terms of sales. Headquartered in Shenzhen, this company is also among the Fortune 500 companies. Right now, Evergrande stands as the most indebted developer in China, with around $300 billion in liabilities.
The recent developments have sparked concerns as the company procured most of its debt in the last five years alone. Evergrande already seems to have missed its two other denominated bonds, adding to the crisis. Now, the financial regulators are being questioned as to how this company could amass almost 2 percent of the whole country’s debt.
Economy experts feel that this massive collapse of Evergrande could be the biggest financial issue for China in years. The firm’s ratings have been downgraded, emphasizing the liquidity concerns. The whole crisis began in the previous year when Chinese Authorities introduced new rules based on the developers’ borrowing costs. These measures capped the companies’ debts based on their assets, capital, and cash flows.
This crisis hit as soon as the financial and operational indicators deteriorated. The company is now crushed under this huge debt after its rapid expansion over the years and snapping various assets during the Chinese economic boom. The company is so huge that its fallout can not only hit the Chinese economy but can spread to other nations’ markets.
However, the recent Global Financial Stability Report from IMF states that China can address these issues, citing some potential risks. The report released on Tuesday pointed at the escalations to larger financial stress. Situations became stressful when Evergrande missed the third round of payments within three weeks. As the wall of loan repayments are soon to hit the term, this move intensified the market fears.
The Director for the Department of Monetary and Capital Markets, Tobias Adrian, shared that the Chinese Authorities have some open leads to address this crisis. Chinese Authorities have the fiscal capacity and the required tools (both institutional and legal) to tackle this issue. Contagion has been contained at the moment, as per Adrian’s statement in a recent interview.
A detailed look at the IMF’s report suggested that the contagion has been restricted to other low-rate firms and property developing groups who are financially fragile. There has been a caution citing the risk of the current scenario’s escalation. The report suggested extensive financial stress. This could impact the Chinese economy and global markets in the worst cases. The financial sector of China can also face the heat in the extreme.
IMF’s directors emphasized that the country should have a clear plan for the crisis to subside. The organization also urged policymakers on laying focus towards constant support economically and act decisively. Anonymous proceedings also hinted that Beijing pushed property developers backed by the state and firms owned by the government to buy some of the developer group’s assets. In the recent developments, Evergrande’s share value shove to an 80-percent low. Its bonds’ trading is also under a halt.