Words: Tom Ward
You’ve likely heard financial whisperings, then rumours, and finally, massive tremors coming from the East over the past few months. And with good reason. China Evergrande now has the honour of being the most indebted property developer in the world with liabilities of over $300bn as of mid December.
It doesn’t look like its getting any better, either; the company had been due to repay interest on roughly $1.2bn of loans on Monday 13th, but by Wednesday 15th December the cash was yet to materialise.
Until recently, Evergande was a success story. The Shenzhen-based developer employs about 200,000 people and generates 3.8 million jobs a year. It currently claims to be working on over 1,300 projects across 280 Chinese cities from theme parks to electric vehicles and a $185 million football team, Guangzhou Evergrande. It was even due to build the world’s largest football stadium, a 100,000-seater appropriately shaped like a lotus flower.
Things started going wrong when Evergrande missed interest payments on loans due to two of its largest creditors on 22 September leading to protestors demanding Evergrande return their money. Reportedly, this was not unexpected; China’s Ministry of Housing and Urban-Rural Development had met with banks the week previously to inform them that Evergrande would not be able to meet its obligations.
The crisis deepened and by the 8th of December Evergrande had missed the 30-day grace period deadline to pay coupons worth $41.9mn and $40.6mn. It then received a demand related to guarantees on $260mn of debt the following week.
With the company unable to repay what it owes – which equal roughly 2 per cent of China’s GDP – its shares have plummeted by roughly 85 percent in 2021. At this point, liquidity, or at least China’s biggest ever debt restructuring is all but inevitable. Writing for Luxuo, Joe Lim has called this “The Biggest Real Estate Meltdown In China”.
“The risk of Evergrande is a market incident which will be properly handled in accordance with the principles of marketization and rule of law, and the rights and interests of creditors and investors will be protected in accordance with the law,” Yi Gang, China’s central bank governor said earlier this month.
Previously, Beijing has led from the front in the wake of corporate disasters. In 2018 is took control of Anbang Insurance Group after detaining its chairman, who was later convicted of fraud. Then, in 2020, government officials took control of transportation and logistics conglomerate HNA and put it into administration after it could not pay its debts. In the case of Evergrande, however, it may be too big for the government to allow it to fail. In other words, the knock-on effect could be catastrophic.
“China Evergrande is ground zero for a colossal economic shift..."
To counter this, in late September The People’s Bank of China – which blamed Everglade’s “own poor management and reckless expansion” for the crisis – injected 110 billion yuan ($17 billion) into the financial market and in December said it would inject 1.2 trillion yuan ($188 billion) to support business and household lending.
In China, the value of homes lost an incredible 16.9 per cent this September based on prices in 2020, according to Bloomberg calculations. “No one is buying new properties because they are getting afraid,” Helen Qiao, chief Greater China economist at Bank of America Corp, told interviewers on Bloomberg Television.
How this will impact the global economy is not yet known but many fear the impact could be catastrophic. “China Evergrande is ground zero for a colossal economic shift,” argue the authors of a Business Insider report on the crisis. “Whether the real estate titan — formerly one of the country’s biggest success stories — sinks or swims from here could reshape the whole world’s economy.”
To counter this, in late September The People’s Bank of China – which blamed Everglade’s “own poor management and reckless expansion” for the crisis – injected 110 billion yuan ($17 billion) into the financial market and in December said it would inject 1.2 trillion yuan ($188 billion) to support business and household lending.
In China, the value of homes lost an incredible 16.9 per cent this September based on prices in 2020, according to Bloomberg calculations. “No one is buying new properties because they are getting afraid,” Helen Qiao, chief Greater China economist at Bank of America Corp, told interviewers on Bloomberg Television.
How this will impact the global economy is not yet known but many fear the impact could be catastrophic. “China Evergrande is ground zero for a colossal economic shift,” argue the authors of a Business Insider report on the crisis. “Whether the real estate titan — formerly one of the country’s biggest success stories — sinks or swims from here could reshape the whole world’s economy.”
China’s President Xi Jinping has been trying to reform China’s property market for some time. The Evergrande crisis certainly plays a part in this, but China has been cutting real estate debt since 2017, reportedly concerned that trillions of dollars of debt could cause a financial crash. Last year it put blockers on how much banks can lend to property developers. In the case of Evergrande, these restrictions prompted the company to offer properties at large discounts to keep cash coming in, but it was not enough to counteract its previous over exertion.
“How do you prick a bubble that every single person, from homeowners to local governments, doesn’t want pricked?” Travis Lundy, an analyst in Hong Kong, told The Washington Post. “Nobody really wants to see this unwind. If this does, there is going to be a lot of pain.”
On a wider scale, China continues to move away from the west. This move towards economic independence began during Trump’s presidency and is said to have continued. Should western companies lose China as a source of cheap manufacturing it will mean a huge profit loss.
“This is the beginning of the end of China’s growth model as we know it,” Leland Miller, CEO of consulting firm China Beige Book, told The New York Times. “The term ‘paradigm shift’ is always overused, so people tend to ignore it. But that’s a good way of describing what’s happening right now.”
Whether Evergrande goes under or not, it is clear that China is radically rethinking how it does business. Hopefully, the solution it arrives at will protect vulnerable investors at home, as well as global markets too.
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