Real estate developer China Evergrande Group is on the verge of collapse, burdened by a huge burden of debt and billions of dollars in real estate that it cannot sell as quickly and profitably as expected.
While trouble has been brewing for a year, it is now coming to a head as the company missed a loan payment in June and more are expected. Evergrande offices have been the scene of angry protests this week, and things could get even uglier on Monday if the company is likely to miss another key interest payment to its increasingly concerned financiers.
Evergrande’s potential collapse raises fears that it could drag other parts of China’s housing market with it – and affect business interests outside of China as well.
Here’s a quick explanation of what you need to know about history.
What is Evergrande?
Evergrande was founded in 1996 in the Chinese city of Shenzhen, across the border from Hong Kong, and is primarily a real estate developer whose core business is buying land and converting it into residential property. Company founder Hui Ka Yan is a former steel worker who was responsible for the real estate boom in China in the 21st
The company has built more than 1,300 housing developments in 280 cities in China and is planning an additional 3,000 projects in various cities across the country.
But like any good conglomerate, it has spread to all sorts of other businesses, including bottled water and groceries, electric vehicles, theme parks, a Netflix-like streaming service with nearly 40 million customers – and even a professional soccer team.
Why is it in trouble?
Debt – and a lot of it. The company has nearly two trillion yuan in debt on its books, which is more than $ 300 billion. The company has aggressively borrowed money to buy more land for development and quickly sold low-margin homes to raise enough cash to start the cycle again – which works well as a business model until it stops working .
In late 2020, new rules that took a closer look at the company’s finances showed a higher-than-expected debt burden. This, coupled with increasing construction delays, frightened buyers and started a vicious circle. The company began its descent to pariah status as lenders and buyers lost their nerve in lockstep.
Every attempt by Evergrande since then to distract from his problems has only served to draw more attention to them. The lenders became more and more insecure. Existing owners were upset. New sales slowed, creating a feedback loop that made lenders even more nervous.
CLOCK | Investors furiously protest outside Evergrande offices:
Chinese real estate jitter
Buyers of Chinese property developer Evergrande are demanding responses from management as fears grow that the company may collapse under its debt burden. (David Kirton / Reuters) 0:34
In June, the company admitted it had failed to pay a loan. The next month, a Chinese court froze a $ 20 million bank deposit at the request of one of its lenders. At least one believer, a paint supplier, is reportedly getting paid in apartments that won’t be ready until 2024.
According to Bloomberg, advance sales on two projects in Hunan were suspended on July 19. Three days later, Hong Kong banks stopped offering mortgages for the company’s incomplete projects in the city. On August 9, two more projects in Kunming halted construction due to defaulted payments, followed by similar halts on projects in Nanjing and Chengdu. There has been snowballing since then. The company’s stock price plummeted 90 percent last year, and most of its bonds are in junk status.
The company is behind on its commitments to more than 70,000 investors. There are more than a million buyers of unfinished projects in the balance. And the pace of problems is increasing. “Sales could continue to plummet as the property developer may struggle to restore the confidence of potential homebuyers,” said Lisa Zhou, an analyst at Bloomberg Intelligence.
Monday numbers are a turning point for the company as Evergrande is set to make a $ 80 million interest payment on one of its many loans, and there is next to no chance it will pay them – which could make the watch ticking towards some undesirable results.
What could happen?
There are a number of somber B-words on the table – bankruptcy, separation, buyout, or bailout – and none of them are ideal.
The first option would be the most painful.
“If Evergrande defaults on its debt as expected and goes through a restructuring process, I don’t see why this should be curbed,” Michel Lowy of distressed investment firm SC Lowy told Reuters.
The delayed Emerald Bay residential project in Hong Kong has scared buyers. (Lam Yik / Bloomberg)
But given the Chinese government’s longstanding pursuit of stability, this is also the most unlikely outcome. The company owes money to 128 different banks and has behind nearly every 20th property sale in China in the past five years. Evergrande has nearly 200,000 permanent employees, but hires nearly four million people annually to work on various projects.
With such a broad reach, analysts covering the sector are confident Beijing won’t just let the company collapse. “Evergrande’s escalating crisis could prompt government action to prevent social instability,” Zhou said.
More likely, a version of the next two options, a split or a buyout, where the company sells assets to raise cash and enlist help to manage things, is more likely. “State-owned companies or other developers can also take on Evergrande’s projects after Chinese officials send accounting and legal experts to review the company’s finances,” Zhou said.
However, a full government bailout is also unlikely. China has cracked down on its soaring tech sector, trying to regulate and ban cryptocurrencies and curb excesses in all possible sectors. Evergrande’s problems could be a test case of Beijing’s desire and ability to manage every facet of the growing economy.
A man walks past a banner promoting the Emerald Bay housing project in Hong Kong amid news that the developer is on the verge of collapse. (Lam Yik / Bloomberg)
Bank of Montreal economist Art Woo said in a statement Friday that he also doubts a bailout will come. “Who could bear the losses is honestly difficult to predict, but we think it is reasonable to assume that the authorities are unlikely to bail out shareholders or creditors to keep moral hazard from increasing and improve financial discipline,” he said .
Organized processing is more likely in order to keep the damage as low as possible. “We don’t think the government has any incentive to save Evergrande (which is a private company),” Nomura analyst Iris Chen said in a customer note.
“But they will not actively push Evergrande down and from our point of view monitor a more orderly default, if at all.”
CLOCK | CBC reported on China’s “ghost towns” of empty towers nearly a decade ago: 
CBC’s Adrienne Arsenault explains how empty skyscrapers are casting shadows on Canada’s economy. 2:31
Are there any effects outside of China?
Not much, right, although Evergrande has assets in Europe and North America – including the posh Château Montebello resort in Quebec – but the company’s troubles are nonetheless a warning to people everywhere.
China has been in a real estate boom for more than two decades as more and more people are investing money in residential real estate – almost regardless of the price or demand for the underlying asset.
The video went viral on social media this month when a 15-tower condominium in Kunming was blown up for being a ghost town with no real residents, eight years after it was built.
While it wasn’t an Evergrande project, the concern is that there are plenty of others out there who like it.
Again the breathtaking demolition videos showing the oversupply of housing in China: 15 skyscrapers in China, which were part of Liyang Star City’s Phase II project, have just been demolished after standing unfinished for eight years because there was no demand from the market . pic.twitter.com/UByqjk8QXX
– @ Jon_Hartley_
China’s Lehman Brothers Moment?
The 2009 financial crisis was triggered by the collapse of two investment banks, Bear Stearns and then Lehman Brothers
That may be far-fetched for the economy as a whole this time around, but it is certainly on the table for the Chinese housing market at least.
“Lehman [was] Quite different from the way it slipped through the financial system and frozen activity, “said Patrick Perret-Green, an independent London analyst.
“Millions of multi-party contracts, each trying to determine their risk,” he said. “With Evergrande, it’s depressing the entire real estate industry.”
“There are other developers who have the same lack of access to liquidity problem and have expanded too much,” Lowy said.
Simon MacAdam, an economist at Capital Economics, believes the Lehman parables are unjustified.
“The story of the Lehman moment in China is far from it,” he said. “Even if it were the first of many property developers to go bankrupt in China, we suspect it would be a political misstep for it to result in a severe slowdown in its economy.”
Regardless, the Evergrande saga is a cautionary tale about the downside of unrestrained property speculation everywhere.
As Woo put it, “Default or bankruptcy doesn’t pose a Lehman-like threat … but it’s still bad news for the economy.”
source https://www.bisayanews.com/2021/09/18/teetering-property-developer-evergrande-sparks-contagion-fears-for-chinas-economy/
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