EVERGRANDE crisis explained | Impact of China's Evergrande crisis on Australia

So you might have heard the name Evergrande appearing in the news lately. Well in this video I’m going to be doing a deep dive into the company and the crisis it’s facing, I’ll also give you some context into the Chinese property market and lastly share how this might impact your investments. 0:00 Introduction 1:35 China's real estate sector 5:24 Evergrande business model 9:36 What happens to Evergrande 12:22 Impact on Australian investors -------- Referral links^ 📈 Stake: https://hellostake.com/referral-program?referrer=christopherc699 🛍️ Cashrewards: https://refer.cashrewards.com.au/x/KqbMLr 😋 Liven: https://app.liven.com.au/n5I1CFwhLfb 🤝 BE MY FRIEND 🤝 Facebook - https://www.facebook.com/ChrisChowShow Instagram - https://www.instagram.com/chrischowshow/ TikTok - https://www.tiktok.com/@ chrischowshow Twitter - https://twitter.com/ChrisChowShow *Disclaimer: I am not a financial adviser, I am not an accountant, I am not a tax adviser. This video and my channel is for general information only, as with anything in life you should do your due diligence and seek independent advice.* ^I may earn a small commission if you use my referral links, your purchase helps support my YouTube channel. -------- So Evergrande aka 恒大集团 is the second largest property developer in China by sales and was founded by businessman Xui Jia Yìn in 1996. Fast forward to October 2009, the company went public on the Hong Kong Stock exchange and raised $722 million at IPO. Most recently the company stated that it had 1,300 projects in over 280 cities in China. Although property development has been Evergrande core business, it has also diversified into wealth management, amusement parks, electric vehicles, health care, bottled water which fun fact had Jackie Chan as an ambassador and even a soccer team - the Guangzhou Evergrande Football Club which it co owns with Alibaba. And according to Forbes, the Evergrande group has 125,000 employees around the world. Now that you’ve had a crash course into the Chinese real estate sector, let’s dig into Evergrande’s business model. Now the construction industry is known to be very capital intensive. This means you need a lot of capital aka money in order to build buildings and sell them for a profit when they are completed. This is why most construction companies will borrow money from banks and institutional investors in order to fund their operations and start the building project. Evergrande also did this but they went cray cray and just took on all the debt - like $300 billion USD in debt So Step 1: borrow money Step 2: buy land for the development with the borrowed money and cash. Step 3: get building materials from suppliers and hire contractors but tell them both that you will pay them later once the project is finished Step 4: build the homes and then sell them at sky high prices Step 5: pay the suppliers and the contractors Step 6: pay the interest on the borrowed money Step 7: start a presale of the next project so you take deposits from home buyers Step 8: use the profit to start the next project And repeat all the steps and you’re basically printing money. Constantly repeating this loop can work as long as everything is in order and the value of property prices keeps rising and Evergrande can keep paying off the interest on all the debt it has. Let’s talk about the crisis that Evergrande finds itself in - so in August 2020, the Chinese government announced the three red lines policy aimed at reining in debt ridden property developers and to make real estate more affordable for the average Chinese family. I won’t go into detail what each of the 3 red lines are but Evergrande crossed all 3 lines which means that it was banned from borrowing anymore money to pay off it’s old debt. This meant that it’s business model was broken and out of desperation Evergrande started offering steep discounts on it’s properties in order to keep cash flowing into the business - but it was ultimately too late. Homebuyers, investors, suppliers and employees were so worried about Evergrande’s financial situation that they’ve been protesting at Evergrande’s offices in several Chinese cities. Shareholders were also also spooked as Evergrande’s share price has plummeted by 80% since the start of the year. This crisis has landed Evergrande on the brink of collapse as it’s falling behind on its debt payments and could be at risk of defaulting. If it defaults and goes bankrupt, then it could lead to widespread financial disaster in China - we’re talking millions of homes left unbuilt, homebuyers will be left without homes that they paid for, banks and investors would be lose their investments, suppliers and contractors could also go bankrupt and hundreds of thousands of employees could lose their job.

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