Mega-developer Evergrande sits on the brink of collapse, with experts warning that the Chinese company’s failure could trigger global shockwaves.
Global markets were battered on Monday as the world's most indebted company, Evergrande, teetered on the verge of a complete unravelling.
The second-largest property developer in China has around $400 billion in debt, and the Chinese government has warned it won’t step in to bail it out, in what some have warned is an approaching crisis of Lehman Brothers proportions.
Here is everything we know about Evergrande and what might happen for Australia if it collapses.
Where did it go wrong for Evergrande?
Evergrande is one of China’s largest property developers and is responsible for more than 1,300 projects in over 280 cities in China.
And if you thought the Aussie property market was booming, it has nothing on China’s.
Home prices in China had risen to be amongst the most expensive in the world, particularly in major cities like Beijing, Shanghai, Shenzhen and Guangzhou.
To keep up with the constantly rising demand, Evergrande kept taking out loans - and then the Chinese government got involved.
The government introduced a range of measures to crack down on excessive borrowing as well as moves to slow housing price growth.
CEO of Deep Data Analytics Mathan Somasundaram told Yahoo Finance the company’s issues stem from the Chinese government's move to curb the property market.
“They flagged a number of months ago that they were willing to give up growth to drive reform,” Somadundaram said.
“The reform was about reducing inequality and reducing cost of living pressures. That has hit several sectors and property is one of them.”
Somasundaram said recent property price growth slowing is “starting to bite” and that is leading to “the unwinding of some exuberance in the sector”.
Will Evergrande collapse?
If Evergrande were to experience a total collapse, it could be dire for not just Australia but the whole world, market analyst at IG Markets Kyle Rodda told Yahoo Finance.
“In the worst case scenario, a total collapse of Evergrande would ripple through the global economy and leave little untouched as far as economic impact,” he said.
“But that’s not the likeliest scenario right now, with the company probably being bailed out in some way, shape or form.”
Rodda said he believes there will be a massive restructure of the company - shrinking it down to size, selling off some of the debt and offloading the more toxic assets to larger and more stable institutions.
“In saying that, I think Chinese authorities are worried about moral hazard, and are playing a bit of a game of chicken to send the message to private businesses that have fallen foul of the Government that they can’t expect their poor management and risky behaviour to be tolerated.”
Somasundaram agreed that a complete and total collapse is not the likely outcome, but he believes the government will eventually give in.
“Evergrande is likely to get a local bailout but the sector is going to face elevated regulation and control from here,” he said.
“The massive growth in the sector may not be there anymore. China was vocal about the risk in the global property market and they are moving ahead of the problem. Sadly in the Western economies, we are too addicted to the property bubble and we will wait for it to burst.”
What does this mean for Australia?
Despite a total collapse being unlikely, Rodda said this is still likely to have knock-on effects for the real estate market in China - which is bad news for Aussie exports.
“This means weaker demand for raw materials, which is part of the reason why we have seen iron ore and mining shares drop in recent days,” he said.
Somasundaram said there will be a likely flow on effect for Aussie property and commodity stocks.
“The Australian budget is running towards $1 trillion debt and we may have lost our main revenue stream [in iron ore],” Somasundaram said.
Not only that, but Somasundaram said the geopolitical relationship between Australia and China was already spelling trouble for our own economy - and this will only serve to exacerbate things.
“The China construction story has now evolved to be more about the ‘Belt and Road’ project around the world than building in China,” he said.
“So, I suspect the Chinese economy will hold up despite these property worries but this will have longer term effects [for] commodities and related economies like Australia.”
Somasundaram said China has already proven with its tech crackdown that no company is “too big to fail” or reform.
“I suspect the property market is going to go through the same process over the next few months and that won’t be positive for Australia and Canada as commodity countries,” he said.