Evergrande: will it collapse and what if it does? | China

What is Evergrande?

Evergrande Real Estate – or Heng Da Group in Chinese – has more than 1,300 construction projects in more than 280 cities across China.

Founded by former Chinese steel maker Xu Jiayin in southern China in 1996, it is now China’s second-largest real estate developer in terms of sales. Its professions range from property development to asset management. It is also a household name for Chinese football fans as it has the biggest team in the country – Guangzhou FC.

Booming activity, which has tapped into many sectors of a growing Chinese economy, has also made Xu one of the richest members of China’s business elites: According to Forbes magazine, Xu has a fortune. personal account of approximately $ 10.6 billion.

Why is Evergrande in trouble?

In short, growing debt and changing regulations.

Evergrande’s troubles came after years of rampant expansion in which its debts grew alongside its size and assets. He is now working under over $ 300 billion in debt.

Some analysts say Evergrande is now the most indebted real estate developer in the world. The company is due to pay $ 84 million in interest on its offshore bonds on Thursday, but lenders are not holding their breath.

The developer is also a victim of Beijing’s shifting approach to managing China’s gigantic economy. Shortly after coming to power in 2013, President Xi Jinping said China should “focus on improving the quality and returns of economic growth …

Debt reduction has become an important part of Xi’s efforts to minimize systemic risk. It’s easier said than done, but Beijing has tried – for example, last year it introduced the so-called “three red lines” for selected developers, which severely limited their ability to work. ‘loan.

In theory, the new rules would force the entire real estate sector to deleverage in order to improve its financial health. They were initially seen as a welcome intervention by some, with UBS Asset Management saying at the start of the year: “We have great confidence in the scope of these policies.”

In reality, things seem to be going haphazardly. Prior to the recent unrest, Evergrande had offered its properties at a reduced rate to ensure sufficient liquidity to keep the business afloat. But the music stopped as buyers lost confidence in a bloated real estate market ripe for a price correction.

Evergrande also pressured staff to lend him money. The loans were billed as high interest investment programs, but those who did not risk losing their premiums. This month, Evergrande stopped reimbursing its employees. Now they are gathering in the streets outside the company’s offices, demanding their money back.

The Evergrande share price has fallen more than 80% this year. The rating agencies have also downgraded the rating of its bonds.

A worker walks past the site where the Guangzhou Evergrande football stadium is being built. The real estate company owns Guangzhou FC, China’s largest soccer team. Photograph: Noel Celis / AFP / Getty Images

How important is it to China and its economy?

For the government, the biggest fear is a potential ripple effect affecting the Chinese economy at large. Worsening geopolitical relations with the West, Covid, as well as the heightened ideological campaign to assert the influence of the ruling Communist Party in the economy have already raised fears of a lasting slowdown in the world’s second-largest economy.

Apparently, Evergrande also owes money to around 171 domestic banks and 121 other financial firms. Therefore, if the company defaults completely, there will be consequences for the banking system. A credit crunch could follow, analysts fear, which would be bad news for China and the global economy.

UBS estimates that there are 10 developers with potentially risky positions with combined contract sales of 1.86 billion yuan, or 2.7 times the size of Evergrande. In other words, Evergrande is just the tip of the iceberg.

Beijing faces a dilemma. If he steps in to bail out Evergrande, what message will that send to other heavily indebted developers? If that doesn’t help, the spinoffs could spread to other sectors of the economy.

What are the international implications?

The short answer is: it’s hard to say. No one really anticipated the implications of the Lehman Brothers’ downfall over a decade ago.

Not everyone thinks it: “A possible default by Evergrande could be a big drag on the real estate industry,” Barclays analysts said in a note. “But we think this is far from China’s Lehman moment.”

Jimmy Chang, chief investment officer for the Rockefeller Global Family Office, believes the ripple effect could extend beyond China. He told CNBC, “If China were to have a serious economic problem because of China Evergrande, the rest of the world economy would be contagious.”

Foreign holders of Evergrande’s dollar-denominated bonds – which total around $ 20 billion – would not have much to say about what happened and would therefore face a write-off, analysts said. They would likely sue their money in international courts.

Markets were scared on Monday as the US S&P fell 1.7% after Evergrande closed 10% lower in Hong Kong – the lowest since May 2010. But the territory’s Hang Seng index fell. rallied on Tuesday, closing at 0.5%, and the S&P also regained lost ground. .

Will Evergrande collapse?

The disappearance of the company is expected. If handled well, however, the process could provide momentum for Xi’s reform of the Chinese economy.

“We believe it is difficult for Evergrande to meet its obligations,” said Tao Wang, UBS chief economist for China. “The delivery of the project will be the most important from the point of view of social stability. Therefore, home buyers and providers are the most important among its stakeholders.

“We believe that one possible scenario is the separation of the project companies from the group to ensure that the value of the asset is materialized and that the cash flow is used only for the construction of the project, while we anticipate that a debt restructuring with a discount will be necessary, ”she added.

How is the situation perceived in China?

Evergrande is expected in China not to have full government support. Global Times editor-in-chief Hu Xijin said last week that Evergrande should not bet on a government bailout on the assumption that it was “too big to fail.”

But many Chinese households have bought properties from the off-plan developer. They can lose their deposits if the business collapses.

Football fans can also be disappointed. As the Evergrande saga unfolds, Guangzhou FC is also seeking help from the government. According to Bloomberg, the Guangdong government is looking to take a stake of at least 10%, and a state-owned company could step in to provide additional help.

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