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  • Writer's pictureIshfaaq Peerally

Evergrande Crisis Explained

China is facing its own Lehman moment with Evergrande on the brink of bankruptcy with $300 billion in liabilities. Evergrande is the second-largest real estate developer in China and its bankruptcy may affect other sectors in China and all over the world.

Since China is a Communist country, only the government owns property in China. The government only rents the land to the developers and they build it and sell it to the people. There has been a boom in the Chinese real estate market in recent years mainly for cultural and also financial reasons. This was a boon to the business of Evergrande, which took massive loans to build these properties.

But as we learned in 2008, Real estate prices don't always go up. The pandemic happened bringing real estate prices down. Besides, the Chinese government has been going after big Chinese companies such as Alibaba $BABA, and Tencent as they are monopolies. Evergrande is a monopoly too and there have been regulations on the leverages of companies. There's also global inflation on commodity prices such as Copper $COPPER and Iron Ore. All of this caused the real estate bubble to burst in China and the highly leveraged business of Evergrande is no longer sustainable.

How far will this crisis spread? Will there be contagion? It will certainly affect the Chinese banks which loaned money both to homeowners and Evergrande. But since these banks are state-owned, the government will probably intervene. As for spread into the US and over the rest of the world, it is less likely to happen. Of course, companies with huge businesses in China such as Apple $AAPL will be affected but this is not a Lehman Brothers type of crash. Lehman Brothers was much bigger and more important. It is too early to speculate how far the contagion will be. But it will certainly create opportunities.

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