Let’s understand what is Evergrande and what is the crisis they are into and how India can be benefited from the same
So ever grande is a Real estate firm and one of the biggest in China, In September, the size of operations and leverage of Chinese real estate firm Evergrande — 1,300 projects in 280 locations, 200,000 employees, $305 billion in debt, and money due to over 170 banks – stunned financial markets, prompting comparisons to the Lehman Brothers collapse.
What’s more startling is the Chinese government’s tacit approval of the real estate behemoth’s demise. There was considerable turmoil in global financial markets due to fears of contagion risk, although it was only temporary. Evergrande’s offshore bondholders are resigned to having a major portion of the $20 billion due to them has written off, with the company having already missed two interests The Chinese government’s aversion to bailing out the real estate player appears to be part of a bigger strategy.
Not only is Beijing attempting to rein in economic speculation and undue debt, but it also appears to be sending a message to international investors to avoid China.
According to data, China has been one of the largest recipients of FPI flows in the past year, which has pushed up asset prices in the country. Disillusioned by China’s regulatory instability, foreign investors appear to be moving cash to India, another Asian nation with similar possibilities.
The spike in FPI, PE, and VC flows into India in recent months supports this theory.
payments in the last two weeks.
CHINA IS COOLING THEIR STOCK MARKET
In 2021, the Chinese stock market had the lowest performance, owing in significant part to government actions. While the Shanghai Composite Index has been practically flat since the beginning of the year, the Hang Seng, which tracks movement in Chinese stocks traded in Hong Kong, has been down more than 12% since January. This contrasts with the Sensex’s impressive gains of over 25% and other US and European indices’ advances of over 15%.
The Chinese government was not happy because of the oversized gain and wealth, excessive speculation, and measures to cut output in various sectors to rebalance demand and supply kept investors on pins and needles in the early months, the crackdown on the tech sector and the resulting crash in tech stocks caused a severe setback to sentiment towards Chinese stocks in July of this year. The EverGrande problem, and the Chinese government’s decision not to bail out the company, appear to be part of Beijing’s broader goal of lowering stock values.
DISSUADING FPIS FLOW
One technique of calming the overheated markets is to control foreign investment flows into Chinese assets. When central banks pumped large sums of stimulus funds into the global economy following last March, global investment flows skyrocketed, propelling most equity markets higher.
China appears to have been the preferred destination for these flows, with net FPI flows of $238 billion into its shares market in the 12 months to June 30, 2021. Foreign investors flocked to Chinese shares and debt instruments as the Chinese economy recovered from the pandemic faster than other major economies last year. Outflows. In the last year, Indian stocks received $28 billion in foreign direct investment (FDI), whereas other Asian markets saw FPI outflows.
Inflows into bonds have followed the same pattern, with Chinese bonds receiving $233 billion in inflows over the last 12 months compared to $1.2 billion inflows into Indian bonds during the same period. It was evident that the Chinese authorities were dealing with a large number of issues.
How Evergrande has been repaying its domestic investors’ dues (it has repaid 10% of its dues to its wealth management clients, who are largely domestic) while defaulting on its dues to overseas bondholders demonstrates that it has little regard for future fund flows into the country or the impact of these events on FPI sentiment.
IMPACT ON INDIA
The Evergrande fiasco will have no direct impact on India, but it will influence the Chinese economy, which will affect all countries. China’s real estate sector accounts for more than 25% of GDP, and its debt-fueled expansion has boosted demand for all commodities, including cement, steel, copper, and aluminium. Global prices of all commodities are affected as the sector slows.
Evergrande has yet to deliver over 200,000 homes, securing the funds of tens of thousands of homebuyers. Finally, banks with Evergrande exposure will see their lending capacity dwindle, resulting in a credit crunch.
As a result, it’s not unexpected that many brokerages are discounting China’s growth rate for 2021 by at least 1%. China’s slowdown may make India’s prospects appear better in contrast, resulting in a shift of foreign portfolios, FDI, and venture capital money to India .
Since August of this year, FPI flows into Indian equity and debt have changed direction, showing that the Chinese government’s move is already resulting in greater flows into India. This year has also seen record amounts of start-up funding from global PE and VC investors, which could be attributable to capital being redirected from China.
Whether or not this is desired is a moot point. Natural market corrections are hampered by these inflows. Since August, when other global markets began to fall due to inflation fears, the Indian market has outperformed. Unfortunately, there isn’t much that authorities can do at this point because the country requires FPI flows to maintain its external account stability; a catch-22 position for regulators.