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Tuesday, September 21, 2021

Why is the world apprehensive about the 'pauperism' of the Chinese company, the fear of recession like Lehman is haunting

On September 15, 2008, the US banking firm Lehman Brothers officially declared itself bankrupt. After this news, the global economy took the path of recession and the stock markets around the world including India collapsed. Now exactly 13 years later, once again the situation seems to be becoming the same. This time, the sound of recession is being heard from China, not America.
Indeed, China's giant real estate company Evergrande is likely to go bankrupt. Evergrande has told the Chinese government that it has more than $300 billion in debt. In Indian rupees, this amount will be around Rs 22 lakh crore. This amount is equal to 2 percent of China's GDP.

What is the reason for this debt: The main reason for Evergrand's debt burden is the company's aggressive policy. In fact, Evergrande focused on expanding, ignoring bank loans. For many years, the company did not allow markets around the world, including China, to realize that it was in huge debt. When the Chinese government changed the rules last year, the country first learned that the company was in debt. However, even then Evergrande did not disclose the amount. However, for the first time ever, Evergrande has officially acknowledged that it has more than $300 billion in debt.

Company's role in China's economy: Real estate company Evergrande has fulfilled the dream of housing millions of people in more than 250 small or big cities of China. About 2 lakh employees work in this company and this company used to generate about 38 lakh jobs in China every year.

Why the world is afraid: Evergrande has been dominating the real estate sector. If this company goes bankrupt, then first of all those people will be affected who have already bought houses in its project before construction. Hard earned money of such people can be lost. There are also many such companies in the country and abroad that do business with Evergrand. Those firms are also at risk of big losses. There is a fear that many small or large companies associated with Evergrand may also go bankrupt.

Impact on China's economy: Apart from this, China's economy will also suffer. It is possible that the pace of China's economy may slow down. This is being said because in the event of Evergrande going bankrupt, the Chinese government may force banks and other lenders to lend less. This is known as a credit crisis. If the government does not lend money to companies at cheap rates or creates problems, then it also affects production.

A credit crisis would be very bad news for the world's second largest economy, as companies that can't borrow find it difficult to grow, and in some cases unable to continue operating. This will also be disappointing news for foreign investors and their interest in China will decrease. At the same time, there is also a apprehension that after the Evergrand Crisis, the Chinese government may tighten the rules for companies as well.

What will be the effect on India: Many companies in India are also directly or indirectly associated with Evergrande. These mainly include companies in the steel, chemicals and metal sectors. A large part of the production of these companies is consumed through Evergrande in real estate in China. Big companies like Tata Steel, SAIL, Jindal Steel, Vedanta, Adani Enterprises are also expected to suffer a major setback in the event of Evergrande going bankrupt. This is the reason why shares of steel, chemicals and metals companies listed on the Bombay Stock Exchange crashed badly on Monday due to the news of Evergrand's possibility of bankruptcy.

More or less the same effect is visible in the stock market of other countries of the world including Japan. The shares of Japan's toilet, AC, paint manufacturing companies have also come to the ground. Other stocks related to banking and real estate listed in the US stock market - Dow Jones and Standard & Poor's are also seen crawling. Overall, due to the Evergrand Crisis, investors in the stock market around the world are panicking and selling their stocks and exiting.

How accurate to link to Lehman Crisis: Analysts and traders have different opinions when comparing Evergrande to the Lehman Brothers Crisis of 2008. Analysts at Barclays argue that the market environment is not the same as it was during the collapse of Lehman Brothers. At the same time, UBS says that the level of default of the current Evergrande is very low compared to the size of China's economy. In such a situation, it cannot become the Lehman Crisis of China.

Uday Kotak's apprehension: However, India's top banker Uday Kotak is linking the Evergrand Crisis to the Lehman Crisis. Uday Kotak wrote in a tweet – Evergrand feels like the Lehman moment of China. It reminds us of IL&FS. The Government of India took swift action in this matter. Provided peace to the financial markets. The government-appointed board has estimated a 61 per cent recovery in IL&FS.

What was the case of IL&FS: Infrastructure Leasing and Financial Services (IL&FS) is a non-banking financial company. In the 80s, several banks and financial firms came together to form IL&FS. Its purpose was to provide technical support to infrastructure projects along with financial assistance. The biggest investor in this was the insurance company LIC. Trust in this company increased and various government projects were also received.

Everything went well with the company for almost two decades. Rating agencies also kept the rating up to date. However, for the first time in 2017, there was news of heavy debt on IL&FS. After this the Indian stock market was badly broken. This case is compared to the Lehman Brothers Crisis in 2008. It is called the Lehman Crisis of India.

Let us tell you that after the news of the bankruptcy of Lehman Brothers of America, financial markets around the world were shaken. After this the world adopted various methods to get itself out of recession. For example, the central banks of the world put emphasis on liquidity. After this, banks also changed the rules regarding liquidity. However, now once again the Evergrand Crisis has raised the concern of the world. However, no concrete response has been given by the Chinese government on dealing with it so far.

What Evergrande has to say: China's Evergrande Group is confident the company will emerge from its darkest phase. The company's chairman said in a letter to its employees on Tuesday, "With your concerted efforts and hard work, we will come out of our worst moments." We are considering every option.