Chinese property developer Evergrande in crisis after shares suspended

The second-largest property developing company in China, Evergrande Group is in the midst of crisis as stock trading has been suspended by authorities after its chairman has been placed under police watch on September 28. The BBC has summarized why these developments in the firm should be of great concern to world economies. Caliber.Az reprints this article.

"A crisis at the world's most indebted company has worsened after its chairman was placed under police surveillance.

It follows earlier reports that other current and former executives at Chinese property giant Evergrande had also been detained.

Evergrande suspended the trading of its shares in Hong Kong on Thursday until further notice.

It marks another low for the firm which was declared to be in default in 2021 after missing a crucial repayment deadline, triggering China's current real estate market crisis.

What does Evergrande do?

Businessman Hui Ka Yan founded Evergrande, formerly known as the Hengda Group, in 1996 in Guangzhou, southern China.

Evergrande Real Estate currently owns more than 1,300 projects in more than 280 cities across China.

The broader Evergrande Group now encompasses far more than just real estate development.

Its businesses range from wealth management to making electric cars and food and drink manufacturing. It even owns one of the country's biggest football teams, Guangzhou FC.

Mr Hui was once Asia's richest person worth an estimated $36.2 billion in 2019, according to Forbes. But his wealth has plummeted since then, with his personal fortune now standing at $3.2 billion (£2.6 billion).

Why is Evergrande in trouble?

Evergrande expanded aggressively to become one of China's biggest companies by borrowing more than $300 billion.

In 2020, Beijing brought in new rules to control the amount owed by big real estate developers.

The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.

Now it is struggling to meet the interest payments on its debts.

This uncertainty has seen Evergrande's shares lose more than 99% of their value in the past three years.

In August, the firm filed for bankruptcy in New York, in a bid to protect its US assets as it worked on a multi-billion dollar deal with creditors.

Why would it matter if Evergrande collapses?

There are several reasons why Evergrande's problems are serious.

Firstly, many people bought property from Evergrande even before building work began. They have paid deposits and could potentially lose that money if it goes bust.

There are also the companies that do business with Evergrande. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.

The third is the potential impact on China's financial system: If Evergrande defaults, banks and other lenders may be forced to lend less.

This could lead to what is known as a credit crunch, when companies struggle to borrow money at affordable rates.

A credit crunch would be very bad news for the world's second largest economy, because companies that can't borrow find it difficult to grow, and in some cases are unable to continue operating.

This may also unnerve foreign investors, who could see China as a less attractive place to put their money.

Is Evergrande 'too big to fail'?

The very serious potential fallout of such a heavily indebted company collapsing has led some analysts to suggest that Beijing may step in.

The Economist Intelligence Unit's Mattie Bekink thinks so: "Rather than risk disrupting supply chains and enraging homeowners, we think the government will probably find a way to ensure Evergrande's core business survives.

Others though are not sure.

In a post on China's chat app and social media platform WeChat, the influential editor-in-chief of state-backed Global Times newspaper Hu Xijin said Evergrande should not rely on a government bailout and instead needs to save itself.

This also chimes with Beijing's aim to rein in corporate debt, which means that such a high-profile bailout could be seen as setting a bad example".