You have probably heard rumors or speculations about the Chinese company, Evergrande, which has accumulated a mountain of debt. It is currently at risk of collapse after being named the world’s most indebted real estate property developer with over $300 billion in liabilities.
Until recently, Evergrande was among the highest ranked property developers and the backbone of China’s economy. And with the company being on life support, it poses a threat to the economy. If this is not resolved, it could send shockwaves to the global financial markets too.
Source - https://en.wikipedia.org/wiki/2020%E2%80%932022_Chinese_property_sector_crisis
The Evergrande group (initially called the Hengda Group) is one of the largest Chinese real estate empires as well as a private sector investment holding company with various subsidiaries. It was also one of the biggest revenue generators in the world.
Hui Ka Yan founded the property giant in 1996 and expanded it rapidly through borrowing. Over the years, the firm had become prominent. It has indirectly sustained and generated about 3.8 million jobs each year while working many different projects across more than 280 Chinese cities.
The firm’s interests extend far beyond housing, development, and management of real estate properties to theme parks, a million dollar football club (Guangzhou F.C.), consumer goods, and electric vehicles. Up until recently, the property giant has been a success story.
Source - https://www.hindustantimes.com/business/how-evergrande-rags-to-riches-founder-hui-ka-yan-is-trying-to-save-his-empire-101633945460054.html
For decades, the Chinese have relied heavily on the real estate business to build wealth. In fact, about 70% of the country’s household wealth is from real estate. That sums up to about 30% of the economy, implying that China leans on this market to have a thriving economy.
This real estate boom put Evergrande at the center of power in China’s economy. Furthermore, Hui Ka Yan was well-connected and a member of an elite political group in China. Mr. Hui’s connections likely gave the company a good reputation among creditors and investors, giving them the confidence to lend and invest in the firm respectively.
Eventually, though, Evergrande’s various aggressive pursuits, ambitions, and massive borrowing resulted in an enormous debt crisis. As of December last year, the crisis deepened when the company missed crucial payments due for domestic and offshore bonds.
Afterwards, a rating agency named Fitch declared Evergrande to be in “restricted default.” The debts had exceeded what the firm could pay off.
source - https://www.japantimes.co.jp/news/2022/08/01/business/evergrande-restructuring-plan-falls-short/
Despite the debt crisis, Evergrande may have been able to stay afloat were it not for two major reasons. One, the Chinese government had since issued a strict “three red lines” rule that severely limits reckless borrowing by property developers.
The new rule hindered Evergrande from borrowing more money to avert its crisis. This forced the firm to start scrambling to raise money by selling some of its sprawling business empires at major discounts to repay debts, which still proves futile so far. The company has since been rendered the world’s most indebted real estate giant.
Two, the real estate sector in China is drastically losing popularity citing low demand for new apartments, further affecting the demand for Evergrande properties. This has contributed to an overall decline in China’s economic growth, which is possibly the biggest slump China has experienced yet.
Things took a turn when Evergrande's shares tumbled by more than 75% in Hong Kong over the last year. The company was suspended from trading stock earlier this year, stirring complaints from angry investors, suppliers, and creditors over potential loss of their money.
Concerns over the firm’s cash flow prompted several Chinese developers to stop constructing homes that had already been sold. 200 projects handled by approximately 80 developers were affected. Angry homebuyers lashed out and threatened to stop paying their mortgages if the work is not completed on schedule.
Meanwhile, Evergrande came up with a restructuring plan to get it back on its feet and repay debts. And while this property giant has survived many crises in the past, pressure is mounting whether it can manage to get out of this deep-rooted mess without severely affecting the Chinese economy and the world at large.
Source - https://www.independent.ie/business/world/evergrande-is-testing-chinas-leaders-but-for-the-party-politics-trumps-economics-40879125.html
While Evergrande’s mountain of debt may not have triggered a financial meltdown, experts speculate that it is bound to slow down China’s economy. For instance, ever since Evergrande’s default, the real estate crisis in China has escalated further.
Several other major property developers like Kaisa and Fantasia have defaulted too, causing mortgage boycotts over the unfinished projects by thousands of home buyers who had already made a down payment. The boycotts have even raised alarm in banks about issuing loans and mortgages.
Also, it definitely wavers the confidence of international investors in China’s real estate sector. That, in turn, makes it much more expensive and difficult for Chinese developers to borrow money from banks and foreign investors. And, it could drop China’s real estate sales this year by a third, posing a threat to the economy.
source - https://www.chinabankingnews.com/2022/05/01/ccp-politburo-convenes-economic-work-meeting/https://cis.org/Cadman/More-Evidence-CCP-Activism-US-Universities
The China Communist Party (CCP) has stepped in and is increasingly trying to take control over the crisis. Beijing on the other hand, has stepped up its efforts to assist despite being a bit reluctant to openly support Evergrande fearing backlash from public individuals who might prefer a bail out.
To tone down the potential effect of Evergrande’s looming collapse, reports suggest that some of the Chinese banks are trying to revive the housing market by offering subsidies, lowering mortgage rates, and providing funds to developers via escrow.
Beijing’s policy reforms are encouraging home buying this year and reviving the housing sector gradually. But in as much as Beijing is trying to help out, it ought to strike the perfect balance to not enable a moral hazard that lets firms defaulting on their debts get away while still supporting Evergrande at the same time.
At the end of the day, there is light at the end of the tunnel. It may take months or even years for Evergrande to successfully restructure and recover, but with Beijing’s subtle approach and CCP’s intervention in reviving the housing sector, the firm’s recovery may be drawing near.