Explained: What is China's Evergrande Crisis? How could it affect global markets?

Chinese indebted real estate company Evergrande has haunted global investors as it is struggling to pay off debts over $300 billion, fueling fears of a financial system crash. Uday Kotak, the Chief Executive Officer (CEO) of the Kotak Mahindra Bank, has also reacted to the development and called it China's Lehman moment. 

Global stock markets have already seen large descends and there are fears that Evergrande may fail in its payment obligations. While the Xi Jinping administration is yet to have a say in the development, reports suggest that Beijing is likely to intervene. Amid all this, let's look at what the Evergrande crisis is and why it is affecting markets globally.

What is Evergrande Crisis?

Founded in 1996, the Evergrande Group is one of the biggest real estate companies in China. It builds residential apartments, shopping malls and office towers. According to the firm, it employs over 2 lakh people and supports 3.8 million jobs. It has 1,300 projects across China and assets worth $350 billion.

The current crisis is due to new limits imposed by Chinese regulators on borrowing, in an attempt to reduce dependency on loans. Evergrande currently has debts over $300 billion. The company's credit ratings have degraded multiple times and shares have also torn down by 80% in 2021. The Chinese reality major has seen protests from thousands of homebuyers who have partially made payment in Evergrande's 800 unfinished residential buildings.

According to reports, the company has borrowed from everywhere it could, including its construction contractors. In 2017, China Citic Bank lent $6.2 billion for an Evergrande project only after its top executives agreed to put at least $4,65,00 each into the project.

According to the firm, the crisis is due to poor demand. Evergrande's expansion moves like trying hands-on sports, electric vehicles, theme parks, food and beverage, bottled water among other businesses have also impacted the company. Reportedly, the company also sold off residential apartments at cheaper rates to raise money.

Why is it affecting markets globally?

The global sentiment is that Evergrande cannot pay the debt obligations this week that is part of $300 billion in liabilities. Some investors believe that the group might become China's Lehman moment, referring to US investor bank Lehman Brothers' collapse in 2008 which led to a global financial crisis.

However, the risk of such wider financial fallout is low. If the company is unable to pay its debts, there will be tremors in the foreign financial markets but it will be temporary. 

Evergrande has $18 billion of pending foreign-currency bonds but most of it has been held by Chinese banks. In the event of defaults, China's banking system can reportedly absorb it, as it has an annual profit of 1.9 trillion yuan and reserves of 5.4 trillion yuan against bad loans.

(With AP inputs)