DNA Explainer: How downfall of China's Evergrande will impact global markets

In bad news for the global stock market, China's Evergrande Group has come under the scrutiny of regulators after falling into a huge debt burden. Evergrande Group is one of China's biggest real estate developers. After the news spread, investors, employees, and suppliers all swarmed its offices in protest claiming they owe huge amounts of money to them, some as much as USD 1 million.

Evergrande missed interest payments due on Monday to at least two of its largest bank creditors.

Evergrande had an outstanding debt of 2 trillion yuan which is USD 310 billion, as of June 30. This is the largest for any publicly traded real-estate management or development company in the world. Of this total outstanding debt, 240 billion yuan which is USD 37.3 billion is due in the next one year.

It is worth mentioning that the debt amount is nearly three times the company's cash holdings worth 86.8 billion yuan or USD 13.5 billion.

What is the issue

China’s second-largest property developer based in Guangzhou, Evergrande Group is faced with an extreme cash crunch.

This has made prospective homebuyers wary of investing as the real estate giant reported a fall in sales in its latest financial results.

Evergrande became one of the biggest real estate sector players, expanding to 280 cities and owning more than 1,300 real estate projects.

The company contributed almost 30% to the Chinese economy, according to the National Bureau of Economic Research.

Evergrande Group accumulated a debt of USD 310 billion as it acquired assets and expanded over the years.

However, of late property sales have been declining for months leading to the company constraining its cash flow further.

In addition to bondholders, the company owes USD 103 billion to construction companies and other business creditors, media reports suggest.

Banks stopped lending to Evergrande after its cash flow slowed and rating companies downgraded the company, citing liquidity concerns.

Evergrande is set to make its onshore bond payment on time, but will it be able to pay USD 83.5 million in interest due on its March 2022 bond is not clear.

Evergrande Group has another USD 47.5 million payment due on September 29 for March 2024 notes.

What led to this

China's regulators imposed new limits on real estate-related borrowing as part of the Communist Party's campaign to reduce reliance on debt.

This crackdown on property developers is what reduced liquidity from Evergrande Group's bonds.

Lenders and other suppliers of capital have not done their job in exerting proper checks and balances on Evergrande.

Evergrande also tied money to launch its own electric vehicles but is making no progress in selling stakes to outside investors.

Some of the firms with holdings in Evergrande bonds are Ashmore Group, BlackRock, HSBC Holdings and UBS Group.