How the fall of real estate giant Evergrande sent shock waves through China | chinese economy
In May 2020, Chen (assumed name) decided to invest 300,000 yuan (£ 34,000) in real estate in Shenyang, northeast China. “I thought the price wasn’t too expensive and I had a little extra money, so I invested it,” he said. “I thought it would be okay because Evergrande is such a big name and such a big company.”
Chen was following in the footsteps of countless Chinese compatriots, entering a booming real estate market that had made big cities like Beijing, Shenzhen and Shanghai some of the most expensive in the world, amid the huge population shift from rural areas to urban areas. .
But in the 16 months since Chen bought his off-plan apartment, Evergrande – a Fortune Global 500 company – has become the nation’s most indebted developer, with more than $ 300 billion (£ 220 billion) in liabilities. , dozens of sprawling residential projects at a standstill and an estimated 1.5 million unfinished apartments that it must provide to investors.
The potential collapse – the culmination of years of borrowing – sent shockwaves through the finance and real estate sectors, and raised concerns that it could affect the entire Chinese financial system , even international markets. There are also concerns about how this will affect iron ore prices. On Thursday, the Fitch Ratings agency downgraded its forecast for economic growth in China, saying “the main factor weighing on the outlook is the slowdown in the real estate sector”.
Two weeks ago, Evergrande released a public statement, admitting it faced “unprecedented hardship” and hired restructuring consultants, but hit back at bankruptcy speculation.
Wednesday seemed to bring some hope, as the company said it had reached a deal to repay interest on a national bond due Thursday. But he did not announce the payment of $ 83.5 million owed in interest to international bondholders on the same day. And as the silence continued until Friday, concerns were compounded by reports that its electric vehicle unit had failed to pay vendors and some staff salaries.
“I see no alternative for the company but to go through some form of debt restructuring, which will involve significant debt rescheduling, potentially a debt-for-equity swap,” said Michel Löwy, Managing Director of the global banking group SC Lowy. .
The Evergrande crisis did not come without warning, and in recent years Chinese regulators have put pressure on the country’s entire property market, valued at $ 52 trillion by Goldman Sachs in 2019.
Across China, dozens of skyscrapers are continually popping up, spread across spaces the size of several football fields. The construction rush caused many problems, including risky finances, poor construction – dramatically demonstrated in viral footage of the massive demolition of 15 skyscrapers in Kunming city – and huge oversupply. Analysts have estimated that 90 million people could be accommodated in the empty properties.
The value of home sales fell 20% year on year as a result of tighter regulations. In August of last year, in response to growing concerns about the housing market, the government introduced debt ceiling ratios, dubbed “three red lines”. Economist George Magnus, associated with the China Center at the University of Oxford, said the three red lines were not “a fatal blow” to the industry, “but they will certainly have exacerbated the financial stress of Many developers knew about a structurally weakened property Magnus added that the government sought to improve financial stability by forcing developers to cut borrowing and curb the oversupply of housing: for Evergrande and a few others was coming anyway.
In November 2018, the Chinese central bank named the company in a report as one of the few financial holding conglomerates that may cause systemic risk. In March 2020, the company set debt reduction targets of $ 23.3 billion per year for three years, and in August it was among 12 top developers called to speak to regulators about the issue. of the three new red lines.
Over the next year, Evergrande rushed into affiliate sales, initial public offerings, and investment campaigns, raising tens of billions of dollars and offering massive property discounts to boost sales, and has set a target of meeting the three red lines by the end of 2022. But, according to the Beike research institute, it has not achieved two targets despite paying off some debt.
As creditors around the world now scramble, it is the stories of the smallest investors that are among the most shocking. Earlier this year, employees of Evergrande and some affiliates were reportedly asked to give the company a short-term loan from their own finances, or to forgo their bonuses.
Some borrowed from friends and family, assuming their anything but compulsory loan was secure. They are now among hundreds of pickets at company offices nationwide. Videos have spread online, with crowds in the lobby of Evergrande’s headquarters in Shenzhen shouting for the return of money earned with their own “blood and sweat.”
“Your conscience has been eaten by dogs,” said a very distressed woman. “We sold everything we had, our two apartments, so that we could buy a property with Evergrande, because you were one of the top 500 companies in the world – I have nothing left,” she said. to the camera.
On Thursday, Evergrande Chairman Xu Jiayin said the company is prioritizing retail investors to buy back their investment products. China’s central bank injected 110 billion yuan of short-term liquidity into the financial system on the same day, the largest amount in eight months. It followed previous injections over three consecutive sessions in response to market fears over Evergrande, Bloomberg reported.
There is rampant speculation about central government intervention. Under Xi Jinping’s leadership, the Chinese Communist Party has taken a close look at the country’s private sectors. Everything from tech giants, individual moguls, private education and social media to rideshare apps, streaming platforms and the entertainment industry – even the actors and artists themselves – have been drawn into regulatory revisions.
A factor common to these sectors is the financial and influential expansion – often on a global scale – beyond the limits set by the party and the way it expects Chinese society to operate. Chinese leaders have expressed their belief that houses are made to live in and not to invest, as they are aimed at a goal of national “moderate prosperity”.
Magnus predicts government intervention, noting that authorities want to make Evergrande an example for other banks, developers and investors, but also cannot allow “a messy default in which citizens lose money. and in which contagion brings the crisis outside of real estate ”. He said: “I imagine that sooner or later the banks and entities will take over the real estate and the liabilities, and other developers will take over the assets as well.
“The main focus of the restructuring will be to spread the liabilities of Evergrande among the stronger companies, so that a thinner unit can still trade or is gradually liquidated.”
Löwy adds that there is a “real possibility” that Beijing will step in to help investors and regular citizen employees and local suppliers.
“I can easily see the government getting involved financially or from a management perspective, to make sure these people are protected. It could even extend to local creditors, ”he said.
“I don’t see this extending to bondholders and offshore creditors, but certainly to suppliers, homebuyers and employees.”
Löwy also speculated that if Evergrande had stopped paying its employees, it was potentially an effort to pressure Beijing to intervene.
Chen isn’t concerned about the risk to his investment and hopes he gets his apartment. “The sooner the better for me. If they hand it over later, I think it doesn’t matter either, ”he said. But what if they don’t put it back at all? “I’ll let him do it. I have already bought the apartment, there is no point in being angry about it.
Additional reports by agencies