Evergrande: Why the Chinese real estate giant is on the verge of collapse | Business | Economic and financial news from a German point of view | DW
Real estate giant China Evergrande Group admitted on Tuesday that it was under “enormous pressure” and that it might not be able to cope with its crippling debts.
Over the past two days, angry protesters have gathered outside the real estate company’s headquarters, demanding to know its future.
Investors are increasingly concerned that if Evergrande collapses, it could spill over to other real estate developers and create systemic risks for the banking system of the world’s second-largest economy.
What is China Evergrande?
Formerly known as Hengda, China Evergrande was until recently the second largest real estate group in the country by sales.
Based in the southern city of Shenzhen, near Hong Kong, Evergrande sells apartments to high and middle income property buyers. It is present in more than 280 cities.
The company was founded in 1997 by Hui Ka Yan (Xu Jiayin in Mandarin), who has since become a billionaire thanks to the opening of the Chinese economy.
In March of last year, Forbes ranked Hui as China’s third richest billionaire – but by December he had fallen to 10th.
Evergrande has grown significantly due to a dramatic real estate boom caused by China’s unprecedented growth.
The company has completed nearly 1,300 commercial, residential and infrastructure projects, and says it employs 200,000 people.
Evergrande has spread to other areas of the economy including food, life insurance, television / film and entertainment. It also operates the Guangzhou FC Football Club, formerly Guangzhou Evergrande.
However, its electric car unit, founded in 2019, does not currently market any vehicles.
Why is Evergrande in trouble?
The Hong Kong-based developer is sinking under a mountain of debt totaling more than $ 300 billion (254 billion euros) after years of borrowing to finance rapid growth.
Evergrande has increased acquisitions in recent years, taking advantage of a real estate frenzy.
But the real estate giant began to falter after Beijing introduced new measures in August 2020 to closely monitor and control the total debt levels of major real estate developers.
Evergrande has relied on pre-sales to fund itself and keep its business afloat, and the crackdown has forced the group to offload properties with increasingly deep discounts.
Investors have made down payments on about 1.5 million properties, Bloomberg reported, citing data from December.
Many buyers have expressed concern on social media about whether they will get their money back after housing projects are suspended.
Evergrande was downgraded by two credit rating agencies last week, and its Hong Kong-listed stocks have slumped more than 80% this year.
On Monday, the Shanghai Stock Exchange suspended trading in the May 2023 Evergrande bond after falling more than 30%.
Dozens of worried investors protested outside the headquarters of struggling Chinese real estate giant Evergrande on Tuesday
What is the company doing to save itself?
On Tuesday, Evergrande released another statement to the Hong Kong Stock Exchange, saying it had hired financial advisers to explore “all possible solutions” to alleviate its liquidity shortage.
The statement warned that there was no guarantee that the real estate company would meet its financial obligations.
The company blamed the “continued negative media reports” for damaging sales during the pivotal period of September, “leading to the continued deterioration of the group’s fundraising, which in turn would exert pressure huge on […] cash and liquidity. “
Even real estate discounts of up to a quarter and the sale of stakes in some of its large assets did not prevent a 29% drop in profits for the first half of the year.
Hui Ka Yan (or Xu Jiayin in Mandarin), is president of the China Evergrande group
Why are the woes of Evergrande so important?
Real estate is one of the main engines of growth in China, responsible for 29% of economic output, and any bankruptcy of such a large company would have huge repercussions.
“The collapse of Evergrande would be the biggest test the Chinese financial system has faced in years,” said Mark Williams, chief economist for Asia at Capital Economics.
Still, “the markets don’t seem concerned about the potential for financial contagion at the moment,” he said, adding that “that would change in the event of a large-scale default.”
Some analysts believe that there is a slim chance that Beijing will allow such a behemoth to sink.
Beijing “will not let Evergrande go bankrupt” because it would undermine the stability of the regime, analysts at US-based SinoInsider said.
Bloomberg reported on Tuesday that China’s Guandong province has hired a team of accountants and legal experts to advise it on Evergrande’s restructuring needs, although the regional government has rejected a bailout request.
With material from AFP and Reuters