Lessons for India from China’s Evergrande woes

Just as we are spasmodically recovering from the Covid-19 pandemic, the potential collapse of the world’s most indebted property developer — China Evergrande Group — threatens the global macroeconomy. Between September and November 2021, Evergrande - China’s second largest property developer – narrowly averted three defaults on its US$-denominated bond coupon payments by remitting an aggregate US$277 million on the eve of the expiry of the 30-day grace period.

This is despite Evergrande reporting around $1.34 billion profits after tax in the first half of 2021 and $11.15 billion cash as recently as June 30 2021.

Ticking time bomb

The Evergrande crisis was a disaster waiting to happen. Founded in 1996 at Guangzhou, China, Evergrande expanded swiftly, financing its growth with debt and pre-sales, which is cash collected in instalments by property developers before the completion of construction and handover of units to buyers.

Evergrande engaged in unrelated diversification. The company sold bottled water, owned China’s best professional soccer team, briefly engaged in pig farming, manufactures electric vehicles and also sold wealth management products to investors, employees and home buyers.

By June 30 2021, Evergrande’s liabilities stood at a mind-boggling $252 billion equivalent to 1.5 per cent of China’s GDP.

Evergrande’s situation was by no means unique. China’s property sector propelled by low-cost debt grew exponentially, which in turn turbo-charged the country’s GDP growth. The slowdown in the property sector, which accounted for 30 per cent of GDP, coincided with the onset of Covid-19.

Read More at https://www.thehindubusinessline.com/opinion/the-evergrande-crisis-has-the-potential-to-become-a-global-contagion/article37527234.ece