Evergrande debt crisis in China Highlights Risks for Developers

Evergrande News – Status of the Debt Crisis

As Evergrande remains in the center of a $300 billion credit crisis, the whole world is waiting to see what will happen next to China’s second largest real estate developer.

If Evergrande defaults, the market fears it will send shockwaves through the Chinese and global economy. The developer owes money to countless financial institutions, which would also feel the crunch.

The coming weeks will be critical for the most indebted real estate developer in the world. The company missed multiple payment deadlines so far. It’s also supposed to make another interest payment next week that could lead them into further debt trouble and jeopardize their operations in China entirely if not paid promptly.

The property developer’s debt crisis has the potential to be a major test for Beijing, as China faces economic uncertainty. Some people in the real estate market compare the recent events with the 2007 crisis and the Lehman Brothers bankruptcy. Opponents of this comparison highlight that Evergrande owns valuable land and not just financial instruments.

In the event that developers go bankrupt or cannot fulfill their obligations, mainland China’s real estate industry could fall into chaos. Over 30% of China’s total GDP is accounted for by this sector alone and any problems would quickly spread throughout other industries.

What is Evergrande?

Evergrande is far more than China’s largest real estate developer. The company ranks in the Global 500, as one of the world’s biggest businesses by revenue.

Key facts about Evergrande:

• Evergrande employs over 200,000 people
• Supports over 4 million jobs throughout its network of suppliers and partners
• Manages more than 1,300 projects in 280+ cities across China
• Founded by billionaire Xu Jiayin in 1996 in Guangzhou, China
• Xu stepped down from his position as chairman of the company’s main real estate arm, Hengda Real Estate Group in August 2021
• Evergrande shares have fallen nearly 90% since July 2020, as the Chinese government cracked down on speculation in the real estate market
• Works on the world’s biggest soccer stadium: A $1.7 billion giant lotus flower that will be able to seat 100,000 spectators

How did it run into trouble?

In order to support an aggressive growth strategy, Evergrande financed large scale projects over the last couple of years that required the company to take on huge amounts of debt.

Relying on debt-fueled investments to exponentially grow is not a new phenomenon in China, and a well known problem that many investors consider a major risk factor in the Chinese economy.

In 2018, the Chinese government forced private property developer and AMC’s largest shareholder, Dalian Wanda Group, to massively downsize, because of its risky debt strategy that was supposed to support an aggressive expansion overseas. And in 2020, a number of state-owned businesses were unable to pay their loans, because of similar issues.

According to Mattie Bekink, China director of the Economist Intelligence Unit, “the story of Evergrande is the story of the deep [and] structural challenges to China’s economy related to debt”. Evergrande recently warned investors that it had issues with cash flow and difficulties finding buyers for some of the company’s assets.

The property sector will continue to worry investors as China’s president Xi Jinping prioritized tackling financial risks in the Chinese housing market.

Asian markets have felt the impact of the Evergrande debt crisis over the last couple of weeks. The company might either suddenly completely collapse, go through a managed collapse, or get rescued by a bailout from the Chinese government.

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