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China’s “Lehman Moment”: Will It Lead The World Into Recession?

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By Tina Garg

These days it is impossible to open social media and not come across phrases like “Lehman Brothers”, “Evergrande crisis”, “Chinese market in crisis”, etc. Anyone from a non-commerce or non-finance background would have a hard time understanding these things if they don’t particularly take interest in financial markets.

But this time, the news is huge and a learned adult should be aware of it. So, here we explain it in very simple words to you so that you don’t miss out.

What Is Evergrande In China?

Evergrande is the second largest privately-owned realty firm in China. One of the biggest property developers in the country, it is highly in debt. How much debt you ask? Currently, it has liabilities close to $300 billion. It is about 2% of China’s entire GDP.

Evergrande was established in 1996 as a bottled water company by Hui Ka Yan. It was then involved in the pig farming business for a short time. Currently, it owns China’s top professional soccer team (Guangzhou Football Club) while simultaneously being a major player in the real estate business.

Evergrande is a firm established on borrowed money. It relies on loans from banks, property buyers and investors. In fact, they collected $6 billion from its own employees, luring them with the prospect of high returns. But it could not fulfil its promises and could not pay back debt.

In the very immediate, it had to pay $83.5 million as bond-interest payment to its bondholders. The money hasn’t been paid as of Friday afternoon. But how did the company find itself under such a crushing debt?

How Did Evergrande Find Itself Under So Much Debt?

For years now, the Chinese government has eased up access to cheap debt for realty firms like Evergrande to invest in land and property. Naturally, these companies take advantage of low-interest rates to buy property in bulk. The real estate sector accounts for one-third of the country’s GDP.

The rate of property in China has been consistently rising for about 2 decades now. To add to it, the property is bought by firms like Evergrande in bulk which creates a scarcity of available land for people, pushing property prices even higher so much so that it has become nearly impossible for the middle class to buy property.

So, these firms have a lot of property with them which they develop into homes, restaurants, offices, etc. But the high prices don’t enable interested people to buy these properties. This has resulted in “ghost cities” of China with a lot of developed buildings where very few people actually live.

Ghost city of China.

Now, what happened was that the government ordered a probe into systematically important realty firms to make sure that they are not breaching their debt limits and obligations. In August 2020, the Chinese government brought new rules, called the “three red lines” that define the borrowing limits of these realty firms.

As per the new rules, Evergrande could not borrow any more money from the market. A company that heavily relies on debt for its business is cut off from its money source. Naturally, they did what anyone in this situation would do. They tried to sell a good portion of its assets.

But the property demand is suffering so it had to offer very heavy discounts on its sales. It led to their insolvency. Hence, it received a major financial blow.

Analysts also believe that this crisis definitely had to happen one day owing to the unsustainable business model of Evergrande. The company held up properties which it was not able to sell in the market. It did not declare those as losses.

They even accuse the company of running a Ponzi scheme, since it kept taking funds to invest in a business model that is long dead.

Role Of The Chinese Government

The Chinese government, for a long time, had been biased towards the major real estate players. They have bailed out the troubled developers from their financial hardships in the past and kept supporting the property bubble.

In fact, Evergrande’s executives sought financial assistance from the Chinese government last year. They agreed that they were not able to meet their debt obligations to banks.

What changed now is that the government wants to support other sectors such as technology. It also wants to take action against income inequality in the country, trying to minimize the divide between the rich and poor. The recent rules in the property sector are clear evidence of the same.

Is This Crisis China’s Own Lehman Moment?

Many in the field have called this crisis China’s Lehman moment. For those of you who are not aware, it was an investment bank based in the U.S.A. that declared bankruptcy in 2008 and was a major factor in the Global Financial Crisis of 2008. There was a public outcry when the bank admitted to its crushing debt.

China's Lehman moment
Lehman Brother Crisis of 2008.

But is Evergrande’s crisis actually as bad as the Lehman Brothers crisis? Well, yes and no. Let’s analyse. Given the size and systemic importance of Evergrande, it can badly affect other sectors in the economy, directly and indirectly.

Lenders who lent money to Evergrande are waiting on their payments. Homebuyers are expecting to get ownership of their property soon. It is also believed that the company may have even more than $300 billion debt to repay that is not reflected in the balance sheet.

Now, analysts believe that the government will actually step in and bring the company out of its financial woes to prevent the whole property sector from crumbling. But even it is going to have negative implications.

To bail the firm out of such heavy debts, a lot of new money would have to be minted which will increase the money supply in the economy, thus, depreciating the value of Chinese currency.

It will have an impact on the foreign markets also. The foreign players who have directly invested money in the property sector would be seeing losses. And while the Chinese would focus to bring the property sector out of stress, it would affect the demand/supply in other fields.

For example, the metal stocks in India which had been riding high for a while have seen correction in their prices and the reason is attributed to the fear of a decrease in metal demand in China.

But S&P Global Ratings believe that this would not cause significant disruption. They said, “Evergrande is small relative to Chinese banks’ total loans. The banking sector’s direct exposure to Evergrande also appears well distributed.

Moreover, it would be far stretched to call it a Lehman moment because Lehman was an important part of the American banking system. It held financial assets. Evergrande, on the other hand, holds lands. So, it cannot really bring the world into recession.

There has been no major blow to the Indian market because of this yet. The international markets have also not reacted very strongly to this.

Most analysts think that it certainly cannot be compared to the 2008 Lehman Brothers moment and while it would have serious repercussions in China, the rest of the world would not be as severely affected by it.

Note: The article was originally published here.

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An ambassador and trained facilitator under Eco Femme (a social enterprise working towards menstrual health in south India), Sanjina is also an active member of the MHM Collective- India and Menstrual Health Alliance- India. She has conducted Menstrual Health sessions in multiple government schools adopted by Rotary District 3240 as part of their WinS project in rural Bengal. She has also delivered training of trainers on SRHR, gender, sexuality and Menstruation for Tomorrow’s Foundation, Vikramshila Education Resource Society, Nirdhan trust and Micro Finance, Tollygunj Women In Need, Paint It Red in Kolkata.

Now as an MH Fellow with YKA, she’s expanding her impressive scope of work further by launching a campaign to facilitate the process of ensuring better menstrual health and SRH services for women residing in correctional homes in West Bengal. The campaign will entail an independent study to take stalk of the present conditions of MHM in correctional homes across the state and use its findings to build public support and political will to take the necessary action.

Saurabh has been associated with YKA as a user and has consistently been writing on the issue MHM and its intersectionality with other issues in the society. Now as an MHM Fellow with YKA, he’s launched the Right to Period campaign, which aims to ensure proper execution of MHM guidelines in Delhi’s schools.

The long-term aim of the campaign is to develop an open culture where menstruation is not treated as a taboo. The campaign also seeks to hold the schools accountable for their responsibilities as an important component in the implementation of MHM policies by making adequate sanitation infrastructure and knowledge of MHM available in school premises.

Read more about his campaign.

Harshita is a psychologist and works to support people with mental health issues, particularly adolescents who are survivors of violence. Associated with the Azadi Foundation in UP, Harshita became an MHM Fellow with YKA, with the aim of promoting better menstrual health.

Her campaign #MeriMarzi aims to promote menstrual health and wellness, hygiene and facilities for female sex workers in UP. She says, “Knowledge about natural body processes is a very basic human right. And for individuals whose occupation is providing sexual services, it becomes even more important.”

Meri Marzi aims to ensure sensitised, non-discriminatory health workers for the needs of female sex workers in the Suraksha Clinics under the UPSACS (Uttar Pradesh State AIDS Control Society) program by creating more dialogues and garnering public support for the cause of sex workers’ menstrual rights. The campaign will also ensure interventions with sex workers to clear misconceptions around overall hygiene management to ensure that results flow both ways.

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MH Fellow Sabna comes with significant experience working with a range of development issues. A co-founder of Project Sakhi Saheli, which aims to combat period poverty and break menstrual taboos, Sabna has, in the past, worked on the issue of menstruation in urban slums of Delhi with women and adolescent girls. She and her team also released MenstraBook, with menstrastories and organised Menstra Tlk in the Delhi School of Social Work to create more conversations on menstruation.

With YKA MHM Fellow Vineet, Sabna launched Menstratalk, a campaign that aims to put an end to period poverty and smash menstrual taboos in society. As a start, the campaign aims to begin conversations on menstrual health with five hundred adolescents and youth in Delhi through offline platforms, and through this community mobilise support to create Period Friendly Institutions out of educational institutes in the city.

Read more about her campaign. 

A student from Delhi School of Social work, Vineet is a part of Project Sakhi Saheli, an initiative by the students of Delhi school of Social Work to create awareness on Menstrual Health and combat Period Poverty. Along with MHM Action Fellow Sabna, Vineet launched Menstratalk, a campaign that aims to put an end to period poverty and smash menstrual taboos in society.

As a start, the campaign aims to begin conversations on menstrual health with five hundred adolescents and youth in Delhi through offline platforms, and through this community mobilise support to create Period Friendly Institutions out of educational institutes in the city.

Find out more about the campaign here.

A native of Bhagalpur district – Bihar, Shalini Jha believes in equal rights for all genders and wants to work for a gender-equal and just society. In the past she’s had a year-long association as a community leader with Haiyya: Organise for Action’s Health Over Stigma campaign. She’s pursuing a Master’s in Literature with Ambedkar University, Delhi and as an MHM Fellow with YKA, recently launched ‘Project अल्हड़ (Alharh)’.

She says, “Bihar is ranked the lowest in India’s SDG Index 2019 for India. Hygienic and comfortable menstruation is a basic human right and sustainable development cannot be ensured if menstruators are deprived of their basic rights.” Project अल्हड़ (Alharh) aims to create a robust sensitised community in Bhagalpur to collectively spread awareness, break the taboo, debunk myths and initiate fearless conversations around menstruation. The campaign aims to reach at least 6000 adolescent girls from government and private schools in Baghalpur district in 2020.

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A psychologist and co-founder of a mental health NGO called Customize Cognition, Ritika forayed into the space of menstrual health and hygiene, sexual and reproductive healthcare and rights and gender equality as an MHM Fellow with YKA. She says, “The experience of working on MHM/SRHR and gender equality has been an enriching and eye-opening experience. I have learned what’s beneath the surface of the issue, be it awareness, lack of resources or disregard for trans men, who also menstruate.”

The Transmen-ses campaign aims to tackle the issue of silence and disregard for trans men’s menstruation needs, by mobilising gender sensitive health professionals and gender neutral restrooms in Lucknow.

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A Computer Science engineer by education, Nitisha started her career in the corporate sector, before realising she wanted to work in the development and social justice space. Since then, she has worked with Teach For India and Care India and is from the founding batch of Indian School of Development Management (ISDM), a one of its kind organisation creating leaders for the development sector through its experiential learning post graduate program.

As a Youth Ki Awaaz Menstrual Health Fellow, Nitisha has started Let’s Talk Period, a campaign to mobilise young people to switch to sustainable period products. She says, “80 lakh women in Delhi use non-biodegradable sanitary products, generate 3000 tonnes of menstrual waste, that takes 500-800 years to decompose; which in turn contributes to the health issues of all menstruators, increased burden of waste management on the city and harmful living environment for all citizens.

Let’s Talk Period aims to change this by

Find out more about her campaign here.

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A former Assistant Secretary with the Ministry of Women and Child Development in West Bengal for three months, Lakshmi Bhavya has been championing the cause of menstrual hygiene in her district. By associating herself with the Lalana Campaign, a holistic menstrual hygiene awareness campaign which is conducted by the Anahat NGO, Lakshmi has been slowly breaking taboos when it comes to periods and menstrual hygiene.

A Gender Rights Activist working with the tribal and marginalized communities in india, Srilekha is a PhD scholar working on understanding body and sexuality among tribal girls, to fill the gaps in research around indigenous women and their stories. Srilekha has worked extensively at the grassroots level with community based organisations, through several advocacy initiatives around Gender, Mental Health, Menstrual Hygiene and Sexual and Reproductive Health Rights (SRHR) for the indigenous in Jharkhand, over the last 6 years.

Srilekha has also contributed to sustainable livelihood projects and legal aid programs for survivors of sex trafficking. She has been conducting research based programs on maternal health, mental health, gender based violence, sex and sexuality. Her interest lies in conducting workshops for young people on life skills, feminism, gender and sexuality, trauma, resilience and interpersonal relationships.

A Guwahati-based college student pursuing her Masters in Tata Institute of Social Sciences, Bidisha started the #BleedwithDignity campaign on the technology platform Change.org, demanding that the Government of Assam install
biodegradable sanitary pad vending machines in all government schools across the state. Her petition on Change.org has already gathered support from over 90000 people and continues to grow.

Bidisha was selected in Change.org’s flagship program ‘She Creates Change’ having run successful online advocacy
campaigns, which were widely recognised. Through the #BleedwithDignity campaign; she organised and celebrated World Menstrual Hygiene Day, 2019 in Guwahati, Assam by hosting a wall mural by collaborating with local organisations. The initiative was widely covered by national and local media, and the mural was later inaugurated by the event’s chief guest Commissioner of Guwahati Municipal Corporation (GMC) Debeswar Malakar, IAS.

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