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Why Evergrande’s Debt Problem Threatens China

Sometimes the company becomes very big and messy, and the government fears what will happen to the wider economy if it fails. In China, the vast real estate developer Evergrande is the company.

Evergrande is characterized by being the most debt-bearing real estate developer in the world and has been working on life support for months. NS Stable drum beat The bad news in the last few weeks has accelerated failure, which many experts have warned of being inevitable.

Rating agency Fitch said the default was “likely” this week. Another rating agency, Moody’s, said Evergrande was running out of cash and time. Evergrande faces over $ 300 billion in debt, hundreds of unfinished homes, and angry suppliers who have closed construction sites. The company has also begun paying late payments by handing over unfinished properties.

Observers are watching whether Chinese regulators are doing well with their commitment to clean up the country’s corporate sector by destroying “debt bombs” like the Evergrande Group.

In the glorious days of 10 years ago, Evergrande sold bottled water, owned the best professional soccer team in China, and even made a small move to pig farming.It has become so big and vast A unit that produces electric vehicles, although mass production is delayed.

Today, Evergrande is seen as a nasty threat to China’s largest banks.

Founded in 1996, the company took advantage of China’s spectacular real estate boom and urbanized a large area of ​​the country, almost Three-quarters of Household assets are tied to housing. This puts Evergrande at the heart of the economic power that has come to rely on the real estate market for supercharged economic growth.

The founder of the millionaire, Xu Jiayin, is a member of the Chinese People’s Political Consultative Conference, an elite group of politically connected advisors. Mr. Xu’s connection probably gave creditors the confidence to continue lending money to Evergrande as it grew and expanded into new businesses. But in the end, Evergrande had more debt than it could pay off.

In recent years, it has faced a lawsuit from a home buyer waiting for the completion of a partially paid condominium. Suppliers and creditors are billing hundreds of billions of dollars on unpaid invoices. Some have suspended the construction of the Evergrande project.

If there are no two issues, Evergrande may have been able to continue. First, Chinese regulators are cracking down on the reckless borrowing habits of real estate developers. As a result, Evergrande began selling part of its vast business empire. It’s not working very well. The electric vehicle business has not been sold yet, Despite the discussion With future buyers. Some experts say the buyer is waiting for a fire sale.

Second, the Chinese real estate market is slowing and demand for new apartments is declining. This week, Beijing’s prominent think tank, the National Institute of Financial Development, declared that the real estate market boom “is showing signs of a turning point” due to sluggish demand and slowing sales data.

Much of the cash Evergrande has earned comes from unfinished, sold apartments. According to a REDD Intelligence study, Evergrande has nearly 800 unfinished projects across China, still waiting for 1.2 million people to move to new homes.

Evergrande has significantly reduced the price of new apartments, but still hasn’t been able to attract new buyers. It in august make Sales are one-fourth less than a year ago.

Beijing may want to say “no”, but the collapse could cause serious damage and make homeowners, suppliers and domestic investors (potentially millions) unhappy. be. And finally, Beijing moved to help other big companies that had big problems in the past.

Over the years, many investors have given money to companies like Evergrande. Because, after all, if things became too unstable, Beijing always believed that it would intervene to save it. And for decades, investors were right.But over the past few years, authorities have Showed greater motivation Fail companies to conquer China Unsustainable Debt problem.

Authorities called Evergrande executives to a meeting last month and instructed them to clear up their debt. They also continue to instruct banks to reduce lending to developers.

A central bank’s campaign to curb real estate debt and reduce banking exposure to troubled developers should mean that Evergrande’s failure has less impact on China’s financial system.

The reality may be more complicated.

Panics from investors and homebuyers can spill over into the real estate market, damaging prices and impacting household wealth and trust. It can also shake global financial markets and make it difficult for other Chinese companies to continue to fund their businesses with foreign investment. Millionaire investor George Soros, who wrote in the Financial Times last week, warned that evergrande defaults could disrupt China’s economy.

Chen Zhiwu, a financial professor at the University of Hong Kong, said failure could lead to a credit crunch for the economy as a whole as financial institutions become more risk averse. “The failure of the Evergrande was not good news for the financial system and the economy as a whole,” he added.

Not everyone is pessimistic. Bruce Pan, an economist at China Renaissance Securities, said defaults could lay the foundation for a healthier economy in the future. “If the belief that Evergrande is” too big to fail “is fading, it will prove that Beijing is more tolerant of defaults, despite pain and confusion in the short term. “Pan said.

Foreign investors will be paying $ 7.4 billion in bonds from Evergrande next year alone. At various points this year, they panicked and took bond trading in the secondary market to new depths. Last week, Evergrande bonds were 50 cents for $ 1. Debt trading was so enthusiastic at some point that regulators temporarily suspended trading.

The company’s major IPO in Hong Kong has lost more than three-quarters of its value in the past year.

Foreign investors are worried that if Evergrande fails, all the money they owe will disappear into the air.Beijing officials said they I don’t want to bail anymore Foreign and domestic bondholders. In bankruptcy proceedings, you are at the bottom of the list of creditors who acquire the assets of a Chinese company.

Why Evergrande’s Debt Problem Threatens China

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