If you follow any type of financial markets, chances are you’ve seen the name Evergrande (OTCMKTS:EGRNF) in many headlines recently. Formally referred to as The Evergrande Group or Evergrande Real Estate Group, the company is China’s second-largest property development corporation as defined by annual sales. It is also ranked No. 122 on Fortune’s most current Global 500 List. Founded in 1996, it has grown steadily, although recent events have called into question how sustainable that growth has been. EGRNF stock has plunged China’s entire financial system has plunged into chaos.
What’s Happening With EGRNF Stock?
Evergrande bills itself as a real estate development corporation, but its holdings span many more industries, ranging from wealth management to food and beverage production. According to BBC, its portfolio includes 1,300 projects across more than 280 Chinese cities. However, it is also one of China’s most indebted companies.
Last week, news emerged that Evergrande is severely lacking in liquidity and was therefore unable to make timely payments on many of its debts. The market has been quick to react. China’s Hang Seng index experienced its worst decline in months, almost instantly falling by 3.3% as Chinese’s financial service sector, spanning everything from big banks to other real estate developers, was slammed. These shockwaves weren’t confined to the Asia. U.S. and European markets also saw noticeable declines. The chaos has continued into this week as many stocks across international markets began this week in the red. This is especially true for stocks with ties to China.
Why It Matters
This impending collapse represents a real challenge to China’s financial system. If Evergrande does go down, investors and economists across the world will be forced to reconsider how strong China’s economy truly is. Significant declines for EGRNF stock will be the least of China’s problems.
For the many companies who have invested in Evergrande through partnerships, the consequences of a collapse could be dire. Building, design and manufacturing firms stand to take significant loses if the company goes bust or is bought out by a competitor. Evergrande’s investment partners have already taken steep losses and that trend is likely to continue as the crisis unfolds. Chinese electric vehicle producers for example, are seeing shares decline already.
These warning signs point directly to a credit crunch, where obtaining a business loan becomes more difficult as banks curb their lending habits. All such trends will most directly impact China, but we’ve already seen that the consequences are global. The more shockwaves are sent through China’s economy, the more they will be felt in markets across the globe.
What’s Next for Evergrande?
As of now, there’s no way to be completely sure. As of this morning, EGRNF stock is continuing to fall.
For as long as China’s “Evergrande contagion” continues, though, all companies with ties to China will need to remain on high alert. This includes any company whose business involves any type of importing or exporting. Investors should note that China is one of America’s largest trading partners.
During the 2018 trade war, we saw what can happen when the U.S. and China’s trade relationships are compromised. This has the potential to be worse for stock markets.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.