Evergrande Group’s debt problems could be a drag on the Chinese economy



TAICANG, China – The one-bedroom apartment was to be Penelope Wu’s retirement home, an escape from the hustle and bustle of Shanghai – or, at least, that’s how Evergrande, the Chinese real estate developer, painted. To get ahead of hundreds of other potential home buyers, Wu paid the sticker price of around $ 200,000 in full last year, even before construction had started.

“It seemed strange to me that Evergrande wanted the money up front. I had no idea then that they were so desperate for the money,” Wu says as she walks her dog outside. of its unfinished building in the Taicang Cultural City project. The mixed development project, an hour’s drive from Shanghai, was halted mid-construction as Evergrande struggles to reduce its debt on orders from Chinese regulators.

Wu and buyers of around 1.4 million Evergrande units across China are now uncertain whether the properties they paid for will ever be built.

Dozens of angry and worried investors have been picketing the Evergrande headquarters in the southern city of Shenzhen for weeks. They bought investment products from Evergrande that now seem almost worthless as its Hong Kong-listed stocks have fallen nearly 90% in value this year.

Evergrande is in default on at least one tranche of bond interest payments totaling around $ 120 million, due in late September. (This noted On Wednesday, he had “resolved” a payment of more than $ 35 million on onshore bonds, but has a second payment of more than $ 85 million on offshore bonds due Thursday.)

The struggling developer, China’s second-largest sales volume last year, is grappling with debt it can’t repay: it owes banks a total of $ 368 billion in loans, as well as debts to contractors and suppliers.

The once-powerful developer’s financial woes highlight a confrontation between two competing goals for the Communist Party of China: to force the Chinese private sector to move away from the speculative and risky lending practices that have pushed debt to dangerous levels – all the while avoiding a financial collapse and the collapse of the real estate sector, in which more than 70% of the country’s urban wealth is locked up.

“This is part of a long-term tax reform aimed at reducing risk, reducing debt and moving away from [local government] land finance. Both of these goals are a good thing, “said Bo Zhuang, chief economist for China at Loomis Sayles, an investment firm.” But there is a risk of further spillover to other developers, potentially causing a crisis. banking or a debt crisis. ”

The company has been engaged in risky practices for years

For nearly three decades, Evergrande – like dozens of Chinese developers – has banked heavily on China’s infrastructure boom. He took out loans often bearing double-digit interest rates and bet his sales of new build apartments would be high enough to pay off growing debt.

Financial regulators have tolerated these risky lending practices because of how developers like Evergrande have helped generate huge amounts of real estate wealth and land sales income for local governments, while transforming millions from citizens to owners.

Evergrande has also adopted innovative ways to finance its ever-growing debt, selling financial products to individual investors and sometimes to its own employees. She remained solvent even as her debts multiplied. Xu Jiayin, president of Evergrande, has been classified Richest man in China in 2017 as Evergrande’s stock price soared.

“Evergrande has always been able to postpone the kind of day of pain, and in the meantime the share of non-performing assets in the balance sheet has become more and more important, and in a sense the problem has become more and more important. bigger, “says Nigel Stevenson, a Hong Kong-based analyst at GMT Research who has followed Evergrande for years.

This time, Evergrande’s problems seem too big to ignore

In the cultural city of Taicang, Evergrande’s stalled tourism and residential project, optimism prevails among some real estate agents and homebuyers that the developer will once again secure enough last-minute financing or receive an extension of loans in advance. course to continue operating.

“Evergrande is too big to fail,” says Mao Kai, a Taicang real estate agent.

Wu, the home buyer, is hoping the city government will step in to bail out local Evergrande projects, or at least make sure the developer finishes building the homes he has already sold.

“There is simply too much money and too many houses at stake to drop a business the size of Evergrande. Bankruptcy would create too many social problems, ”she said.

But this time around, Evergrande’s issues may be too big to ignore. The Chinese state has firmly indicated that it will no longer allow developers like Evergrande to take out loans it cannot repay and sell investment apartments that no one needs just to raise house prices. .

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Policymakers have also signaled that they will push local governments to reduce their financial dependence on the sale of land for profit, one of the main drivers of China’s real estate boom.

An economic slowdown caused by the COVID pandemic was already weighing on real estate purchases. Then last summer, new government policies to curb speculative investment restricted the number of homes people could buy. These rules have taken some buyers by surprise.

“We only learned of the new limits after my mother had already signed a contract with Evergrande. If the company knew the rules at the time, why did they charge us for the apartment?” says a Shanghai resident whose mother bought a unit in the Evergrande Taicang project when she already owned a second home in the city. His purchase is illegal under the new rules, which is why the resident asked NPR not to use his name. He is now trying to get his mother’s deposit back.

A day of assessment?

Last year, Beijing also implemented its “Three red lines” policy, the number referring to strict ceilings imposed on the debt ratio that a real estate developer can hold in relation to its assets, equity and liquidity.

Under this combination of new rules, Evergrande was unable to sell enough apartments quickly enough to pay off debts at the pace imposed by regulators.

“Now it looks like the day of the accounts is fast approaching,” said Stevenson of GMT.

One question is whether pushing Evergrande to get back into shape can really destabilize the entire Chinese banking system. Buyers are so scared of Evergrande that other developers are now seeing lower property sales and falling stock prices, which could trigger more property defaults in China. Global Stock Markets have moved uncertainty too. This month, the Dow Jones Industrial posted its worst performance since July and the S&P 500 and NASDAQ were at their lowest since May.

“Household confidence in buying a new property is deteriorating very quickly,” says Zhuang of Loomis Sayles.

The fallout is already apparent

Government regulators are now trying to find other companies that can buy out Evergrande and its assets before its woes spread. But they lack the time to contain the potential economic fallout.

This is because Evergrande owes more than loans to banks. It also has unpaid bills totaling around $ 300 billion owed to contractors and suppliers – who are now also facing economic hardship.

One of these contractors is a construction company Jiangsu Nantong Sanjian, which was supposed to complete the Evergrande Taicang project, in addition to dozens of others across the country.

“The past two days have been filled with endless fighting with the police and with desperate buyers. Evergrande has no money to reimburse us, so we are also fighting with renovators and other contractors that we have hired, ”said Sheng Weixin, director of Jiangsu Nantong Sanjian.

With an ashy face in worry, he sits alone at his desk in the middle of an empty construction site in Taicang, trying to figure out his own future. He sent all of his employees, many of whom were migrant workers, home in August because he could no longer afford them.

“What do we do with all our workers, the country people? We still owe them three months’ wages, ”Sheng said.

It points to the concrete and steel skeletons of nearly a dozen unfinished Evergrande projects nearby – which another developer agreed to take over in July, to deal with debt problems himself.

In the absence of a payment from Evergrande or a state bailout, Sheng predicts that his own business will likely go bankrupt in a matter of months. “This,” he said, “is not a laughing matter.”



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