A crisis at the world's most indebted company has worsened after news it had missed a crucial repayment deadline.
Chinese property giant Evergrande, whose liabilities exceed $300bn (£228bn), failed to meet interest payments to international investors.
That prompted Fitch, an agency that rates companies' financial risk, to declare Evergrande in default.
The crisis has spooked investors who fear contagion across China's property and banking sectors.
Evergrande had been due to repay interest on about $1.2bn of international loans on Monday. But by Wednesday the money had still not been transferred.
On Thursday, Fitch, one the world's biggest credit rating agencies, declared Evergrande in default, a move that could hamper the company's restructuring talks with investors.
Fitch, whose risk ratings are closely followed by major investors seeking to deploy billions of dollars, said it contacted Evergrande about the non-payment but received no response. "We are therefore assuming they were not paid," it said.
Evergrande has been selling assets in recent months to raise the money it owes to customers, investors and suppliers.
In a statement last Friday the company said it could not guarantee "to perform its financial obligations", sending its share price crashing.
What does Evergrande do?Businessman Hui Ka Yan founded Evergrande, formerly known as the Hengda Group, in 1996 in Guangzhou, southern China.
Evergrande Real Estate currently owns more than 1,300 projects in more than 280 cities across China.
The broader Evergrande Group now encompasses far more than just real estate development.
Its businesses range from wealth management, making electric cars and food and drink manufacturing. It even owns one of country's biggest football teams - Guangzhou FC.
Mr Hui was once Asia's richest person and, despite seeing his wealth plummet in recent months, has a personal fortune of more than $10bn (£7.3bn), according to Forbes.
Why is Evergrande in trouble?Evergrande expanded aggressively to become one of China's biggest companies by borrowing more than $300bn.
Last year, Beijing brought in new rules to control the amount owed by big real estate developers.
The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.
Now, it is struggling to meet the interest payments on its debts.
This uncertainty has seen Evergrande's share price tumble by almost 90% over the last year.
Why would it matter if Evergrande collapses?There are several reasons why Evergrande's problems are serious.
Firstly, many people bought property from Evergrande even before building work began. They have paid deposits and could potentially lose that money if it goes bust.
There are also the companies that do business with Evergrande. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.
The third is the potential impact on China's financial system: If Evergrande defaults, banks and other lenders may be forced to lend less.
This could lead to what is known as a credit crunch, when companies struggle to borrow money at affordable rates.
A credit crunch would be very bad news for the world's second largest economy, because companies that can't borrow find it difficult to grow, and in some cases are unable to continue operating.
This may also unnerve foreign investors, who could see China as a less attractive place to put their money.
Is Evergrande 'too big to fail'?The very serious potential fallout of such a heavily-indebted company collapsing has led some analysts to suggest that Beijing may step in.
The Economist Intelligence Unit's Mattie Bekink thinks so: "Rather than risk disrupting supply chains and enraging homeowners, we think the government will probably find a way to ensure Evergrande's core business survives."
Others though are not sure.
In a post on China's chat app and social media platform WeChat, the influential editor-in-chief of state-backed Global Times newspaper Hu Xijin said Evergrande should not rely on a government bailout and instead needs to save itself.
This also chimes with Beijing's aim to rein in corporate debt, which means that such a high profile bailout could be seen as setting a bad example.
https://www.bbc.com/news/business-58579833 ....
I feel like there should be a thread on this topic, in this section somewhere.
The following is also of interest.
Goldman Flags $8.2 Trillion Threat Worse Than China EvergrandeSep 30, 2021
The real worry concerning the China Evergrande default drama is the inevitable where-there’s-smoke-there’s-fire paranoia that accompanies debt stumbles.
The most worrisome such blaze, say analysts at Goldman Sachs, is surging local government debt levels that President Xi Jinping’s men have done their best to hide. The default troubles at the globe’s most indebted property development seem like small embers compared to the $8.2 trillion worth of local government financing vehicles outstanding.
And that’s just the LGFVs we know of. The data that Goldman’s Maggie Wei highlights is as of the end of 2020. Clearly, the tally is higher now—perhaps markedly. Ten months ago, these shadowy investment schemes had reached 53 trillion yuan, up from 16 trillion yuan, or $2.47 trillion, in 2013. They now amount to roughly 52% of China’s gross domestic product, topping the official amount of outstanding government debt.
In other words, as scary at the $300 billion Evergrande story might be, Xi’s government has much bigger problems on its hands. The most acute: keeping GDP this year from falling too far below the 6% Beijing hoped to produce without adding to the nation’s bubble troubles.
The forces behind local governments sitting on financing-vehicle debt worth twice the size of Germany’s GDP date back to 2008. Even before the Lehman Brothers crisis, Communist Party dynamics encouraged municipal borrowing binges. The way local officials got attention in Beijing—and rose to national prominence—was producing above-average GDP rates.
https://www.forbes.com/sites/williampesek/2021/09/30/goldman-flags-82-trillion-threat-worse-than-china-evergrande/ ....
When american automaker general motors and US banks were threatened with bankruptcy in 2008, some said the best course of action was to allow troubled US automakers and banks to fail. Here we are in 2021 with chinese evergrande in jeopardy. Will china bail them out? Nope. China says time to save yourself evergrande. Finally those who opposed automaker and bank bailouts in 2008, have a friend in china who agrees with them.
While we may not have had the opportunity to see how american history may have played out had banks and automakers not been bailed out in 2009. It does appear china is about to illustrate for us how events may have unfolded had the TARP bill not been passed. I would have to think, there could be valuable life lessons in the default and potential failure of a business with greater than $300 billion net worth. I wonder what those valuable life lessons would look like if they could be defined.
Bail outs of too big to fail business. Or no bail outs. Best methods of recovery post crisis?
