China’s largest property developer, Evergrande, is facing one of its biggest crises. The amount of debt incurred has swelled to more than $300 billion, forcing the developers to file for bankruptcy. Evergrande’s stock prices have plummeted by 80 per cent since the beginning of the year and the developer is trying to sell its real estate assets to reduce the debt overload. However, the move might prove to be too little too late, given the fact that demand is already muted in the Chinese property market currently.
Considering that over three-fourths of the Chinese wealth is locked in real estate and the sector accounts for around 29 per cent of its economic output, the impact of Evergrande’s crisis will reverberate across the economy signaling systematic failure. There is a workforce of more than 200,000 personnel directly employed in Evergrande and another 3.8 million indirectly rely on the developer for their employment. The impact of the crisis is bound to be far-reaching. The fact that few state-run Chinese agencies already got busted the previous year will further add to the looming economic meltdown.
The impact will reverberate across the global economy as China has been increasingly playing a major role in the post-lockdown international economic recovery. Already many international stock markets have dipped since the beginning of this week with some richest men on the planet losing a significant slice of their wealth.
Evergrande’s bonds have earned elevated yields in the past, which has resulted in major global financial houses such as HSBC, Goldman Sachs, Fidelity, Blackrock, etc investing heavily. The international exposure to Evergrande’s bond is to the tune of $1.7 billion and the company’s deep crisis will further send ripples in the world economy.
Impact of Crisis on India
In a closely-knit present world economy, the Evergrande crisis will impact Indian economic health. India itself is preparing the ground for economic recovery after the double whammy of poor economic sentiments and the pandemic. Amidst the fatigue, a crisis like Evergrande is going to adversely impact the health of the economy. Iron ore, steel, and chemical exports to China have risen in recent months. An economic meltdown in China won’t augur well for these sectors. Moreover, these companies in India will be exposed to vendors of
Evergrande. The heat of delay in payments to vendors might be felt far and wide.
Additionally, if the Chinese authorities do not rein in and control the economic backlash, the Chinese Yuan will plummet. A weakened currency will further hamper India’s export ambitions.
Green Shoots in the Longer Run
It is unlikely that India will remain completely unscathed from the current Chinese turmoil. Yet, it can also unlock new opportunities in the longer run. In 2019, when the trade was started escalating between China and the USA, many global manufactures seriously started to diversify their supply chain and scout for new sourcing destinations. The China+1 strategy further accentuated in 2020, when the COVID crisis broke. The world saw the folly in too
much reliance on a single sourcing destination. An economic crisis in China will further force most of the global manufacturers to rethink their supply chain.
When global supply chains become recalibrated, India holds a chance to consolidate its position as a powerful alternative to China.
Indian manufacturing is grossly underutilized. Manufacturing constitutes just 18 per cent of the Indian GDP despite inherent advantages such as lower wage rates, ample R&D facilities, and the availability of a skilled workforce. India’s fragile infrastructure has affected its manufacturing ambitions.
However, in the past 5-7 years, India has systematically improved its overall infrastructure can now compete with other upcoming destinations such as Vietnam and Thailand to attract FDI and new manufacturing ventures. In this regard, the Evergrande crisis can be a blessing in disguise.
If companies increasingly step into the ecosystem, it will also help Indian real estate. The demand for industrial land, commercial spaces, warehouses, etc will rise. New job opportunities will also help the residential demand.
Another benefit could be the increased interest of international PE players and institutional investors in Indian real estate. Overexposure to Chinese real estate has increased the financial risk for many global financial houses. In the future, investors will prefer a more equitable and sustainable approach. India will be a natural alternative and draw investor’s attention.
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