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The world could be in the midst of a new full-blown financial crisis, and this one, is made in China.

In the past couple of days, global financial markets have been roiled by the implosion of China’s second-biggest real estate company Evergrande, which till recently was considered too big to fail.

Emerging markets including India, too, have been at the receiving end of the mini-market meltdown of sorts, with the BSE Sensex taking a 525-point tumble on Monday and down by another 215 points by noon on Tuesday before recovering most of the losses.

The Sensex’s fall was in line with the losses in global markets. The S&P 500 Index closed 1.7% in the red, the Dow was down 1.78% and the Nasdaq Composite shed more than 2.1% on Monday.

What is the Evergrande debt crisis all about?

Evergrande is China’s second-largest real estate company, and it owes a lot of money to its creditors—more than $300 billion to be precise. To be sure, most immediately, it needs to pay $8.5 billion in interest payouts, by Thursday, although it does have a 30-day grace period in which to do that.

While there is nothing unusual about big companies owing big monies to creditors, Evergrande has no money left to pay and is set to default on its bond payments.

This, as many analysts now say, had been the non-COVID, non-inflation risk that had been hiding in the shadows all along, which many people saw but either chose to ignore or did not talk about as loudly as they should have.

On September 16, Evergrande suspended trading on its onshore bonds after a ratings downgrade.

Just how big is Evergrande?

Very big. It owns more than 1,300 projects across 280 Chinese cities and towns and singularly controls 2% of the country’s real estate market. As many as 1.5 million people in China are reportedly waiting for their homes to be delivered. This is an inventory worth a staggering $1 trillion.

So, who holds Evergrande’s bonds?

Evergrande’s bonds are held in passive exchange-traded funds (ETFs) across emerging markets. They are also held by several US and European money management companies that hold them in separate accounts.

Some marquee money managers that have a significant exposure to Evergrande’s bonds are the Zurich-based UBS Group, New York’s BlackRock and London-based HSBC Holdings and Ashmore Group, which have all taken a tumble on the stock markets. Fidelity, PIMCO and Goldman Sachs also have significant exposure to the company’s debt.

These investors were attracted by the high positive bond yields being offered by the Chinese real estate companies on their debt instruments, when most of the rest of the geographies and sectors across the world are offering negative yields, with bonds worth more than $165 trillion reportedly in negative yield territory.

Can this contagion spread?

It can, and perhaps will, if the Chinese authorities do nothing about it. Global markets are waiting for the Chinese central bank to inject some liquidity, to effectively bail the real estate giant out, at least for now.

The real estate industry makes up for nearly 29% of the Chinese economic output. If Evergrande goes down, it could exacerbate a slowdown in the country’s residential property market, which was down by 20% in August from last year.

In fact, China is currently sitting on an unsold inventory of 60-65 million residential units.

How has it impacted Indian companies?

Stocks of several top Indian steel, mining and chemical companies including some of the index’s best-performing stocks like Tata Steel, Jindal Steel, SAIL, JSW Steel, Tata Chemicals, NMDC and DCW have gone down by 10-15% in the last five trading sessions.

All these companies would have had receivables from or linked to the Chinese real estate firm. This could now be in jeopardy, if Evergrande goes down.

Commodity exporting companies will continue to take a hit if this crisis is not sorted out in time and if the contagion does indeed spread.

5Paisa Research Team

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