Nordea Market Principal Analyst Tuuli Koivu scrutinized the issue and stated that the company may not be saved due to the change in China's policies.
The concern that the Chinese real estate development company Evergrande, which has a known debt of 300 billion dollars, could harm the financial stability in China, reduced the risk appetite in the markets around the world.
According to the information on Evergrande's website, which was founded in 1996, the company, which has more than 1,300 projects in more than 280 cities, was ranked 122nd in the Fortune 500 list in 2020.
RISKS ARE EXPECTED TO BE LIMITED IN CASE THE COMPANY goes bankrupt
The company employs 200,000 people, with total assets of approximately $350 billion (2 trillion 300 billion yuan) and annual sales revenues of more than $110 billion (700 billion yuan).
On the other hand, it is estimated that these steps may have been effective in the deterioration in financials, while the company invested in areas such as technology and health outside of the construction field.
CHINA'S STEPS TO TIGHTEN BORROWING CRITERIA PLAYED A SIGNIFICANT ROLE
Analysts stated that steps such as the borrowing habits of the company's management, the delayed cash flow cycles in new areas of investment along with the main field of activity, and the tightening of borrowing criteria by China played an important role in the deterioration of the company's financial structure.
"THE PERCENT OF THE GDP LEFT BEHIND THE TREND IN INCREASING HOUSING PRICES"
Pointing out that the ratio of household indebtedness to Gross Domestic Product (GDP) in China in recent years has exceeded 60 percent, analysts said that this situation interrupted the trend in the ever-increasing housing prices in recent years, causing a decrease in the company's revenues.
"THEY ARE Afraid of Experiencing THE PROBLEMS OF THE 2008 GLOBAL FINANCE CRISIS"
Koivu stated that Chinese leaders are afraid of experiencing the problems like the 2008 global financial crisis in the USA regarding the real sector, and that they are taking steps to regulate the over-indebted construction sector.
Emphasizing that the change in China's stance on the issue stands out, Koivu said, "Financial conditions for construction companies in China have been tightened over the years. In addition, speculative steps such as buying a land and waiting for its price to increase were restricted by law." made its assessment.
CHINA NEEDS TO CHANGE THE GROWTH MODEL
Koivu continued his assessment as follows: "The problems with Evergrande arose as a result of the regulations in question. I do not think that this situation came as a surprise to the Chinese leaders. It was obvious that the tightening in loans would cause some problems, but China had to change its growth model in order to achieve its long-term goals. and this structural change was necessary to avoid bigger problems."
"CHINA FOCUS ON THE LONG TERM, NOT THE SHORT TERM"
Koivu, on the other hand, reminding that tight financial conditions for construction companies will be in effect for the future, "China is currently focused on the long-term outlook, not the short-term growth figures. Therefore, investors along with Chinese leaders are for some companies that the basics of the business environment in China are focused on. He doesn't mind being shaken." used the phrases.
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