What will happen if Evergrande collapses, and how China will manage the fallout

Evergrande paid $83 million in interest on dollar bonds before the deadline.
However, payments like these are just a small part of the $300 billion in debt that the company owes.

China will place homebuyers, creditors, and existing shareholders first if the company is bankrupt.

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Evergrande in China, China's second largest real-estate developer is on the verge of collapse and Beijing seems unlikely to bail it out.

A last-minute bond-interest payment of $83.5 million was made by the giant to avoid default. It faces several additional bond payments due to be made by the company that it missed. The debt total of $300 billion is still large.

Global ripple effects could result from an Evergrande crash. Linette Lopez, an Insider journalist, recently stated that China's $52 trillion real estate sector will collapse, causing ripple effects across the globe.

According to Dr. Xin, a senior lecturer at King's College London in Chinese and East Asian Business, Evergrande will collapse on a national scale.

"Homebuyers are the priority for government. Sun stated that the shareholders who are still around will be the lowest. "And then there are the creditors who will negotiate the terms of how much of their loans they have recovered.

Priority one: Social stability

Sun stated that "The government's priority in managing bankruptcies and defaults is always to ensure socio stability and negotiate with creditors." He also cited the collapse of large Chinese companies in the past.

Sun stated that the government will prioritise homebuyers to achieve this end. China's central bank pledged to protect homebuyer's interests at the end of September. This was in response to investor concerns that Evergrande's problems would spread across financial markets.

Sun stated that Evergrande's home will be delivered by local governments.

Sun stated that "If Evergrande falls, local governments will attempt to secure Evergrande assets within their localities and ask other developers for the valuable assets." "They will borrow money from banks to continue to deliver Evergrande properties to previous buyers."

This is a large proportion of China's population. According to a January research paper by the National Center for Biotechnology Information on homeownership in China, more than 90% of Chinese households are homeowners. For comparison, the US has a 65% homeownership ratio. Real estate is a significant source of wealth for many citizens. 70% of Chinese households have real estate as their source of wealth.

According to its website, Evergrande development alone houses more than 12,000,000 people in 280 cities across China. There are also 1.6 million undeliverable apartments, for which deposits have been made and the balance is still to be paid.

Tending to creditors is the second priority

Sun stated that the government will tend to lenders in order of priority, which includes Evergrande bondholders, domestic banks and suppliers Evergrande owes money.

Shengjing Bank is one of Evergrande's major lenders. However, Matt Levine, a Bloomberg reporter in September, stated that Evergrande borrowed money from all sources.

Levine wrote that Evergrande received financing from almost everyone, including investors, customers, suppliers, and customers. It seems unlikely that anyone knew what they were getting into.

A Shenzhen-based developer is also facing fast approaching end-of year deadlines for more than $500 million owed creditors.

Sun stated that these people would have to negotiate. "Some of their loans may be recovered from Evergrande, but the proportion of their recovery is up to negotiation."

Priority: Shareholders

Sun stated that an Evergrande failure will not be without pain.

Sun stated that the shareholders who are already shareholders will suffer the most. Their equity will be destroyed. About 70% of shares belonged to the founder's relatives, which will all be erased."

Hui Ka Yan (chairman and founder of Evergrande) has already seen a substantial portion of his wealth disappear this year. Hui Ka Yan has received $5.3 billion in dividends over the last four years and his net worth is $7.3 billion, a $16 million decrease since the start of the year.

Hui faces more financial challenges. Bloomberg reported that the Chinese government instructed Hui to use his personal wealth for Evergrande's huge debt burden.

The largest Evergrande shareholder, after Hui's family is Chinese Estates Holdings Ltd. This investment holding company holds 4.6% of the company. Evergrande also has shareholders from major American investment firms such as Dimensional Fund Investors (.2%), The Vanguard Group (.6%), and BlackRock Fund Advisors.