REPORT–CASE

STUDY
WHAT PAKISTAN NEEDS TO LEARN FROM THE
CHINESE RECENT ECONOMIC CRISIS (REAL ESTATE)? :
CHINESE EVERGRANDE CRISIS

Submitted by:

Muhammad Ammar Haider–2111394–Title page, Chinese Economic Crisis.

Muhammad Ahmad Khan–2111379–What Pakistan needs to learn from it.
Ahsaan Ul Haq – 2111358 – conclusion, Executive summary.
INTRODUCTION – WHAT IS THE CHINESE EVERGRANDE
CRISIS?
China's real estate market has been overly dependent on high levels of leverage for the past ten
years, and it has steadily raised this ratio through a variety of channels in an effort to grow its
company and asset base.
Leading Chinese real estate firm Evergrande Group adopts this as its corporate philosophy. The
Evergrande Group's asset-liability ratio has stayed above 80% for the past ten years. Although
the substantial risk it presents has long existed, it was not completely revealed until the
introduction of new policies in more recent times. According to Evergrande Group's annual
report, as of June 2021, Evergrande's debt was close to 2 trillion Yuan, whereas the Gross
domestic product of Shanghai, China's economic center, was less than 4 trillion Yuan. The recent
event of Evergrande's overdue payment has driven Evergrande to the forefront. In the meantime
time, Moody's has been consistently devaluing Evergrande Group's rankings in recent months.
But under this scenario, the problem of how the Evergrande Group's debt crisis arises will
provide tremendous value for thought and vigilance. For business occupation as well as
expansion, Evergrande employs highly leveraged financing methods. Evergrande's overleveraged
business activity is troublesome, while the stress from short-term liabilities makes Evergrande
difficult. According to Evergrande, nearly 1.6 trillion (about 80%) of Evergrande's liabilities of
RMB 1,966.534 billion seem to be short-term liabilities as of June 30, 2021. However,
Evergrande's cash and equivalents, including restricted funds, total only 86.772 billion Yuan.
Evergrande is under tremendous liquidity solvency pressure as a result of this, which is also the
root cause of Evergrande's debt crisis. Evergrande faces future uncertainty as a result of highly
leveraged financing, and the company's significant number of short-term liabilities puts it on the
edge of breaking the capital chain at the same time.
Unfortunately, due to external market factors, Evergrande's financing capacity and highly liquid
capabilities for survival and turnover have been drastically decreased in recent years. The
Chinese government's series of policies on the real estate industry are the most influential
external market factors. In recent decades, China's real estate market has experienced rapid
development and expansion. As of 1998, Chinese housing has lay terms not only housing
demand but also certain financial qualities and functions. However, with China's real estate
market's reckless expansion and growth, the real estate economic bubble has evolved into a
major problem in the Chinese economy. Evergrande has achieved extremely high profits and
liquidity as a result of the easing policy implemented during this time period.
Nevertheless, as the Chinese government recognized the risks of overly relying on real estate to
stimulate the economy, the mind - set of China's real estate policy has shifted.
The impediment to Evergrande's financing is a modification of the policy. For the first time, the
central government formally proposed the policy positioning that "houses should have a role in
housing, not finance" at the end of 2016. As a result, a series of extremely strict policy controls
have indeed been implemented. The new 'three red lines' regulations for real estate
entrepreneurship financing control will be released in September 2020. A "three red lines"
restrict the ability the upper limit of real estate companies' asset-liability, net debt, and short-term
debt ratios. There will be different degrees of control once the top limit is reached. Based on the
data, in the end of the year 2020, all of Evergrande's debt indicators had exceeded the limits
mentioned above. So in other words, the Evergrande is unlikely to borrow the new interest
bearing debt to pay back the original debt until it meets the "three red line" standards, increasing
Evergrande's debt pressure significantly. Furthermore, Evergrande Group's plan to go public in
2020 as "Shenzhen Special Economic Zone Real Estate & Properties (Group) Co., Ltd." was put
on hold. This is unquestionably another impediment to Evergrande's funding channels.
The real estate industry's liquidity ability is primarily reflected inside the sales of core assets,
which is the key to resolving the liquidity problem. Implementing the discount and depositing
the house plan for the payment collection was not ideal after financing was limited. According to
a Hong Kong Stock Exchange announcement, China Evergrande Group's contractual property
sales in June, July, as well as early September have been 71.63 billion Yuan. 43.78 billion, and
38.08 billion Yuan, respectively, indicating a clear downward trend. Furthermore, Evergrande
anticipates that now the company's property agreement sales in China will continue to decline
sharply in late September.
WHAT PAKISTAN NEEDS TO LEARN FROM THIS?

The evergrande crisis in China shows us how much this country depends on their real-estate.
People all over the world are comparing it with the bankruptcy of Lehman Brothers leading to
the great recession in 2008. This event is not only having a impact on China’s economy but
others country worldwide are also affected by this event. As Pakistan is a neighboring country
with a lot of Chinese investment in their country, can be affected the most as china may reduce
their investments to stable their economy and also there may be a delay or stop in the projects
likes CPEC.
Now coming over to what Pakistan can learn from it:
1) Keep your finances in check.
It has never been easier to get into debt or harder to get out of debt in the modern era. You can
borrow money from banks, investment funds, credit card companies, and even some private
individuals with just a few clicks or by using a credit card. They conduct business in this manner;
through interest and fees, they generate billions of dollars. Ironically, as if they really care about
you, they will always encourage you to borrow more. Avoid falling into this trap.
2) Put money into organic growth.
The majority of businesses are attempting this, and it appears to be obvious. Let's say you own a
lemonade stand. You start making a lot of money and your customer base grows. Adding more
employees or opening a new store would be beneficial. However, you shouldn't let your desire
for expansion get in the way of taking care of your product's quality. This is a fatal error made by
some companies; They grow and invest in growth, but they forget the most important reason
they're in business: their product!
3) Market data:
In light of the global and national initiatives that are already underway, regulatory authorities
need to collaborate with the real estate industry to provide market data, analysis, and information
that is accurate and up to date. This includes data related to the financing of real estate
investment and development.
4) Straightforwardness and understanding:
Targets for broadened transparency and comprehension of real estate markets, securities markets,
and derivatives markets should be adopted by national and international authorities.
5) Effects of external policy:
The real estate industry should discuss the effects of public policies on the real estate sector with
governments and policymakers at the global, national, and local levels.
6) Hub for information clearinghouse:
Senior decision-makers in the real estate, banking, and finance sectors, as well as public-sector
policymakers, should have access to a platform for tracking and communicating significant new
policies and recent research in order to address issues such as changes in the derivatives market
and reform of the global and national banking sector.
7) Emerging economies:
Emerging market economies (EMEs) require specific policy options; For specific issues related
to asset price volatility in EMEs, the World Economic Forum ought to provide its convening
platform.

CONCLUSION:
From this entire crisis we can learn that there are two key points worth considering and paying
attention to in the Evergrande incident.
 Evergrande has a very heavy debt ratio as well as current debt ratio in terms of its internal
operations. This has enabled Evergrande to show high asset expansion capabilities in a
short period of time, but it is also key to Evergrande's demise. It is worth noting that
 Evergrande underperformed in the profit-risk tradeoff and overlooked the value of risk
management.
 Evergrande did not adopt the changing trends of the times when considering external
market factors. In China, the trend of government actions and policies is closely linked to
the current development trend.
In China, the position of policies by the government is irrevocably linked to the current
development trend. The government of China proposed a policy to regulate the housing market
as early as 2016, but Evergrande Group's business strategy remained unchanged. Underneath the
current tightening policy, this has put Evergrande in a bind. Finally, this report shows us the
causes of Evergrande's current situation both from internal and external perspectives. According
to the facts, the root reason for the crisis is internal high-liquidity liabilities, and external market
forces are the fuse that sets off liquidity risks. The root reason for this issue is Evergrande's
underestimation of consequences and lack of understanding of current trends, which deserves
consideration.
REFERENCEIS:
https://www.wsj.com/articles/china-evergrandes-debt-crisis-fallout-losses-layoffs-and-more-
defaults-11665651773
https://www.bbc.com/news/business-58579833
https://www.reuters.com/business/snowballing-crisis-evergrande-worlds-most-indebted-
developer-2022-07-29/
https://en.wikipedia.org/wiki/2020%E2%80%932022_Chinese_property_sector_crisis
https://www.scmp.com/topics/evergrande-crisis

Thank you!