Every now and then a company gets so big and chaotic that governments fear what would happen to the economy as a whole if it failed. In China, Evergrande, a sprawling real estate developer, is that company.
Evergrande has a reputation for being the most heavily indebted real estate developer in the world and has been life sustaining for months. A constant drumming of bad news over the past few weeks has hastened what many experts warn of the inevitable: failure.
The rating agency Fitch said this week that default appears “likely”. Another rating agency, Moody’s, said Evergrande was out of money and time. Evergrande faces more than $ 300 billion in debt, hundreds of unfinished homes, and angry vendors who have shut down construction sites. The company has even started paying overdue bills by handing over unfinished properties.
Observers are watching to see if Chinese regulators keep their promise to clean up the country’s corporate sector by collapsing “debt bombs” like Evergrande.
How did Evergrande become such a problem?
In its glory a decade ago, Evergrande sold bottled water, owned China’s top professional soccer team, and even briefly tried its hand at pig breeding. It got so big and spacious that it actually has a unit that makes electric cars despite delaying mass production.
Today Evergrande is seen as a shaky threat to China’s largest banks.
Founded in 1996, the company helped fuel China’s epic real estate boom, which urbanized large parts of the country and resulted in nearly three-quarters of household assets being tied up in housing. This put Evergrande at the center of power in an economy that relied on the real estate market for accelerated economic growth.
Its billionaire founder Xu Jiayin is a member of the Political Consultative Conference of the Chinese People, an elite group of politically well-connected advisers. Mr. Xu’s connections likely gave creditors more confidence to keep lending money to Evergrande as it grew and expanded into new business. Eventually, Evergrande owed more than she could pay off.
In recent years she has faced lawsuits from home buyers who are still waiting for the partially paid apartments to be completed. Suppliers and creditors have claimed hundreds of billions of dollars in outstanding invoices. Some have suspended the construction of Evergrande projects.
Why is the company in such big trouble now?
Evergrande might have continued if it hadn’t been for two problems. First, Chinese regulators are cracking down on the reckless lending habits of property developers. This has forced Evergrande to sell part of its sprawling business empire. It’s not going so well. The electric vehicle business has yet to be sold despite discussions with potential buyers. Some experts say buyers are waiting for a distress sale.
Second, China’s real estate market is slowing down and demand for new homes is lower. This week, the National Institution for Finance and Development, a well-known Beijing think tank, said the real estate boom “has shown signs of a turning point,” citing weak demand and slowing sales.
Much of the money Evergrande has been able to raise comes from pre-sold apartments that have not yet been completed. Evergrande has nearly 800 projects across China that are unfinished and up to 1.2 million people still waiting to move into their new homes, according to a study by REDD Intelligence.
Business & Economy
Updated
9/10/2021, 7:00 p.m. ET
Evergrande has cut prices on new apartments, but even that hasn’t attracted new buyers. In August it made a quarter less sales than a year ago.
Will Chinese regulators step in to save it?
Beijing will be tempted to say “no,” but a collapse could wreak serious damage, leaving homeowners, suppliers and domestic investors – potentially in the millions – unhappy. And Beijing, in the past, has finally moved on to helping other big companies with big problems.
For years, many investors gave money to firms like Evergrande believing that if things started to shake, Beijing would always step in to save it. And investors have been right for decades. But in recent years, authorities have shown a greater willingness to fail businesses in order to deal with China’s unsustainable debt problem.
Authorities drew Evergrande executives to a meeting last month and asked them to fix their debts. They also continued to urge their banks to reduce their lending to the developer.
How would Evergrande’s failure affect China’s economy?
A central bank campaign to tame real estate debt and reduce the banking sector’s exposure to troubled developers should mean that a failure of Evergrande would have less of an impact on China’s financial system.
Reality can be more complicated.
Investor and home buyers panic could spill over into the property market and depress prices, affecting wealth and household confidence. It could also shake global financial markets and make it difficult for other Chinese companies to continue to fund their businesses with foreign investments. In a letter in the Financial Times last week, billionaire George Soros warned that a default on Evergrande could crash China’s economy.
Chen Zhiwu, a professor of finance at the University of Hong Kong, said failure could lead to a credit crunch for the entire economy as financial institutions become more risk averse. A failure at Evergrande, he added, was “not good news for the financial system or the wider economy.”
Not everyone is that pessimistic. Bruce Pang, an economist at China Renaissance Securities, said a default could lay the foundation for a healthier economy in the future. “If Evergrande fails with the dwindling belief that ‘too big to fail’, it will prove Beijing’s more tolerance for defaults despite pain and disruption in the short term,” Pang said.
Should foreign investors be concerned?
Foreign investors owe $ 7.4 billion in bond payments from Evergrande for the next year alone. At various points this year they panicked and drove bond trading to new heights in the secondary market. For the past week, Evergrande bonds cost 50 cents a dollar. Trading its debt was so hectic at one point that regulators temporarily halted trading.
The company’s main stock listing in Hong Kong has lost more than three-quarters of its value over the past year.
Foreign investors fear that if Evergrande fails, all of the money owed them will vanish into thin air. Beijing authorities have signaled that they are no longer ready to bail out foreign and domestic bondholders. In any bankruptcy proceeding, they would be at the bottom of the list of creditors receiving the Chinese company’s assets.
source https://www.bisayanews.com/2021/09/11/why-evergrandes-debt-problems-threaten-china/
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