The wealthy have been flocking to China for more than a decade now. The country has been making a name for themselves in successful technology development, infrastructure and science.
However, Fortune 500 company and largest real estate developer in China, Evergrande, is shining a light on an enormous debt issue throughout the country and while currently facing bankruptcy in the billions, the rich across the world have mixed reviews as to who to trust and where to invest their money.
Within the past several weeks, the world’s top billionaires such as Elon Musk, Jeff Bezos, Bill Gates, Mark Zuckerberg and Warren Buffett among others have reportedly lost more than a collective $26 billion of their own fortunes due to investments in Evergrande.
Several reasons attribute to Evergrande’s struggle, leaving many debating the trustworthiness of China investments.
What Is Evergrande?
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The company is a part of the Global 500, meaning it’s one of the world’s biggest businesses by revenue. It employs around 200,000 people and indirectly sustains more than 3.8 million jobs annually, according to CNN.
Founded by Chinese billionaire Xu Jiayin, Evergrande owns more than 1,300 projects in more than 280 cities across China. The group is also invested in electric vehicles, sports and theme parks. They own a food and beverage business and they’ve built the world’s biggest soccer school.
The problem investors are seeing today is the debt of the property giant to the tune of $300 billion. Evergrande has already missed one $83.5 million payment in early September and owe another $47.5 million interest payment this week. They are in the midst of liquidating shares owned in Shengjing Bank but if the group defaults, it will affect many more than the wealthy celebrities.
Chinese Government Scrambles To Avoid Chaos
As Evergrande grew and became more prosperous, obtaining large loans both in the states and abroad continued with ease. CNBC reports one portfolio manager believes the Evergrande crisis is the result of two well-known business errors.
One, they continued to borrow money, becoming the world’s most indebted property developer. The second, is the corporate leadership. Evergrande confirmed this week, property sales would continue to deteriorate, just making the problem worse.
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In the past decade, however, the economy was booming, droves of wealthy people were buying up homes and apartments in order to live there, or likely, resell at a higher price.
Allowing large corporations to virtually lose control wasn’t lost on the Chinese government. According to The Washington Post, months ago, policymakers began classifying Evergrande as risky and the government has begun to quietly introduce new policies to limit a fallout.
In light of the Evergrande announcements, China is working to reduce their risk and prevent a contagion. In the past several weeks, local governments have transferred funds into custodian accounts to ensure their unfinished houses will be completed. They’ve put limits on discounts, for fear developers will sell out to meet their target and tank home prices in the process.
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Investor Opinions – Not All Is Lost
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As the world holds their breath, waiting to see if Evergrande can climb out of the very deep hole they’ve dug, wealthy investors and celebrities are weighing in at the financial fragility of China’s economic system and whether or not they’ve made a big mistake.
Foreign investors are most definitely concerned. In a situation such as this, Evergrande will first try to maintain stability on their home ground. Home buyers will come first, followed by small investors and an amendment or extension on the foreign loans.
According to Financial Express, Amazon founder Jeff Bezos lost $5.2 billion from his investment in the real estate giant, Bill Gates lost $1.94 billion, and Facebook founder Mark Zuckerberg lost $3.27 billion. Other well-known investors included Google co-founders, Larry Page and Sergey Brin, former Microsoft CEO Steve Ballmer, Larry Ellison of Oracle Corporation and investor Warren Buffet.
Tesla’s CEO Elon Musk lost $7.15 billion in the Evergrande investment, but he’s not losing hope for future profit. Just last week, MSN reports Musk praised China’s tech sector, including the automobile industry and claimed they were a global leader in digitalization. Musk told the audience at the World Internet Conference in Wuzhen he planned to continue research and development efforts and his investment in the country.
Muddy Waters Research founder Carson Block called the numbers not trustworthy and believes Beijing will begin cracking down on US-listed companies.
Despite confidence in the technology sector or a disdain for the financial health of China, Evergrande stocks have plummeted nearly 80 percent in 2021 and the likelihood of the real estate giant getting away without serious financial repercussions, seems slim.
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Sources: CNN, CNBC, The Washington Post, Financial Express, MSN
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