The company owes hundreds of billions of dollars, and creditors are beating down the doors. As one expert described the property developer as being in a “death spiral”, Evergrande this week warned it could default on its substantial debts. It has about $408 billion in total liabilities.
“The group has risks of defaults on borrowings and cases of litigation outside of its normal course of business,” the Shenzhen-based company said in a recent earnings statement. “Shareholders and potential investors are advised to exercise caution when dealing in the securities of the group.”
SCRAMBLING TO PAY LENDERS
Evergrande has been scrambling to raise funds to pay its many lenders, who are threatening legal action. It has responded by halting projects, renewing borrowings and disposing of equity interests and assets.
The cash-strapped company has also delayed payments to suppliers and contractors in a sign its financial troubles are impacting business operations. Subsequently, the share price has taken a battering, down 72 per cent in Hong Kong this year.
Evergrande’s bonds are also under pressure. And to rub salt in the wound, its electric vehicle business was recently identified as the worst performing stock in the world.
Hedge Fund Telemetry LLC president Thomas Thornton warned the giant Chinese company was in a “death spiral”. “This is not just a China-only issue as the amount of foreign money at risk is substantial,” he warned on Twitter.
It’s something Australia should be concerned about. Should Evergrande collapse, the reduction in construction would significantly reduce demand for iron ore. That in turn could push the price for iron ore lower. China’s construction industry accounts for about half of the steel used in the country, the AFR reports.
Today iron ore was trading at $194 a tonne, with Australia already feeling the squeeze from Beijing, which has vowed to find alternative suppliers and reduce consumption as tensions between the countries refuse to abate.
Michael Shoebridge, director of defence, strategy and national security at the Australian Strategic Policy Institute, said the Evergrande issue was just part of bigger picture of China’s economy as a whole.
“A huge part of China’s economic program continues to be stimulus of the domestic economy through the construction and development sector and it’s been great for Australia as it sucked in huge amounts of iron ore and also coal – until they decided to cease trade,” he told news.com.au. “Evergrande is the second-biggest property developer so its future really matters to the future of China’s economy,” he said.
As well as the immediate effect the collapse of Evergrande would have on demand for Australia’s iron ore, it would be likely to send jitters through the whole Chinese real estate market, making it harder for other developers to raise debt – turning the whole situation into a vicious circle.