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Chinese company Evergrande: Too big to fail?

On Monday the world’s markets had a taste of what only the expectation of defaults from Chinese real estate mammoth Evergrande could cause. The Dow Jones tumbled hundreds of points to under 34k, the Nasdaq lost its record 15k mark for the first time in weeks, and the Hong Kong stock exchange navigated the day in peril of what was happening around this gigantic company.

One of the world’s 500 biggest companies, Evergrande, is centered on real estate operations but has diversified strongly into other industries in recent years. Raising money for these new endeavors is the critical issue that has left the company at the center of a global market crash. As a result, it has gained a debt of almost $300B to pay for its diversification and various projects, even within its real estate portfolio. In addition, the aggressiveness of Evergrande’s growth towards other pursuits, far from its core business, left it cash-strapped.

The crisis

Evergrande started to hit the global markets late last week when it was revealed that it was possible that it would default on interest payments to major banks in China, which were due on Monday if the company wasn’t able to raise cash at a fast pace. On Monday, most global markets were strong-hit when the possibility of default from such a big debtor was considered by investors, causing a massive sell-off.

The world will be watching Evergrande this week more than ever, and an impact on all global markets may be expected. On Wednesday, the company is due to pay interest to private investors who hold their bonds- with a $3B yield- worth almost $83 million. Most experts and analysts expect the company to default. Evergrande’s crisis can be compared easily to the Lehman Brothers crisis in the US, and the markets worry about its effects on China, the world’s second-biggest economy.

Although experts don’t expect the company to pay on its due date, it won’t be in technical default for 30 days more. During that time, damage to foreign markets may increase, and the effect may be seen in the short term.

Some important private hedge funds own Evergrande bonds.

How will this crisis affect the world markets? Do you expect another crash like yesterday’s?

To learn more about the markets and investing, navigate FlexInvest Academy.

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