Saturday, December 4

How the collapse of real estate giant Evergrande caused a commotion in China | Chinese economy

IIn May 2020, Chen (not his real name) decided to invest 300,000 yuan (£ 34,000) in property in the city of Shenyang, in northeast China. “I thought the price was not too expensive and I had some extra money, so I invested it,” he said. “I thought everything was going to be okay because Evergrande is a great name and company.”

Chen was following in the footsteps of countless Chinese compatriots, entering a booming real estate market that had turned big cities like Beijing, Shenzhen and Shanghai into some of the most expensive in the world, amid huge population transfers from rural areas. to urban ones. .

But in the 16 months since Chen bought his off-plan apartment, Evergrande, a Fortune Global 500 company, has become the country’s most indebted developer, with more than $ 300bn (£ 220bn) in liabilities, dozens of sprawling residential projects stalled and an estimated 1.5 million unfinished apartments that you must deliver to investors.

The potential collapse, the culmination of years of indebtedness, has set off shockwaves in the financial and property sectors, and raised concerns that it could affect China’s entire financial system, including international markets. There are also concerns about how it will affect iron ore prices. On Thursday, Fitch Ratings agency lowered its forecast for China’s economic growth, saying “the main factor weighing on the outlook is the slowdown in the real estate sector.”

Two weeks ago, Evergrande issued a public statement, admitting that it faced “unprecedented difficulties” and had hired restructuring consultants, but responded to bankruptcy speculation.

Wednesday seemed to bring some hope, as the company announced that it had reached an agreement to repay the interest on a national bond that matures on Thursday. But it did not announce the payment of $ 83.5 million owed in interest to international bondholders on the same day. And as the silence continued through Friday, concerns were compounded by reports that its electric vehicle unit had lost payments to suppliers and the salaries of some employees.

“I don’t see any alternative for the company than to go through some kind of debt restructuring, which will involve significant debt rescheduling, potentially a debt-for-equity swap,” said Michel Löwy, CEO of global banking group SC Lowy. . .

People demand repayment of loans and financial products at Evergrande's Shenzhen headquarters.
People demand repayment of loans and financial products at Evergrande’s Shenzhen headquarters. Photograph: David Kirton / Reuters

The Evergrande crisis hasn’t come without warning, and in recent years Chinese regulators have been putting pressure on the country’s entire property market, valued at $ 52 trillion by Goldman Sachs in 2019.

Across China, dozens of skyscrapers continually pop up, spread out over spaces the size of several football fields. The rush to build has caused numerous problems, including risky finances, poor construction, dramatically demonstrated in viral footage from the massive demolition of 15 skyscrapers in the city of Kunming, and a huge oversupply. Analysts have estimated that 90 million people could be staying in the vacant properties.

The value of home sales has fallen 20% year-on-year as a result of stricter regulation. In August last year, in response to growing concerns about the housing market, the government introduced debt limit indices, called “three red lines.” Economist George Magnus, an associate at the University of Oxford China Center, said the three red lines were not “a fatal blow” to the industry, “but will certainly have exacerbated the financial stress that many developers were experiencing at a property. that is structurally weakened. ” Magnus added that the government has sought to improve financial stability by getting developers to reduce indebtedness and curb the excess supply of housing: “I’m sure this has brought things to a head, but also that this debt crisis because Evergrande and some others were coming anyway. “

In November 2018, China’s central bank named the company in a report as one of the few financial conglomerates that could cause systemic risk. In March 2020, the company set targets to reduce debt by $ 23.3 billion a year for three years, and in August it was among 12 major developers called to speak with regulators about the new three red lines.

Over the next year, Evergrande rushed through the sale of subsidiary businesses, initial public offerings, and investor drives, raising tens of billions of dollars and offering massive discounts on properties to drive sales, and set a goal of meeting all three red lines by the end of 2022. But, according to the Beike research institute, it failed to achieve two goals despite paying off part of the debt.

Guangzhou Evergrande Stadium, designed to be the world's largest dedicated soccer stadium, is under construction in South China's Guangdong Province.
Guangzhou Evergrande Stadium, designed to be the world’s largest dedicated soccer stadium, is under construction in South China’s Guangdong Province. Photograph: AFP / Getty Images

With creditors around the world struggling now, it is the stories of the smallest investors that are among the most shocking. Earlier this year, Evergrande employees and some subsidiaries were advised to give the company a short-term loan out of their own finances or to waive their bonuses.

Some borrowed from friends and family, assuming their quasi-mandatory loan was secure. They are now among the hundreds of pickets at company offices across the country. The videos were broadcast online, with crowds inside the lobby of Evergrande’s Shenzhen headquarters shouting for the return of money they earned with their own “blood and sweat.”

“Your conscience has been eaten by dogs,” said a very distraught woman. “We sold everything we had, our two floors, to be able to buy a property with Evergrande, because you were one of the 500 most important companies in the world; I have nothing left, ”he told the camera.

On Thursday, Evergrande Chairman Xu Jiayin said the company was prioritizing ensuring that retail investors redeem its investment products. China’s central bank injected 110 billion yuan in short-term liquidity in the financial system on the same day, the most in eight months. It followed previous injections for three consecutive sessions in response to market fears about Evergrande, Bloomberg reported.

There is rampant speculation about whether the central government will intervene. Under the leadership of Xi Jinping, the Communist Party of China has been closely scrutinizing the country’s private sectors. Everything from tech giants, individual moguls, private education, and social media to ride-sharing apps, streaming platforms, and the entertainment business – even the actors and entertainers themselves – have been swept up in regulatory reviews.

A common factor in these sectors is financial and influential expansion, often globally, beyond the limits set by the party and how it expects Chinese society to function. China’s leadership has expressed its belief that homes are for living, not investing, as it works towards a goal of national “moderate prosperity”.

Magnus predicts government intervention, noting that the authorities want to set an example from Evergrande to other banks, developers and investors, but also cannot allow “a disorderly default in which citizens lose money and in which contagion drives the crisis out. of the property, ”he said. : “I imagine that, sooner or later, banks and entities will take over the shares and liabilities of the home, and other developers will also take over the assets.

A woman walks through Evergrande City Square, next to her apartment buildings in Beijing.
A woman walks through Evergrande City Square, next to her apartment buildings in Beijing. Photograph: Roman Pilipey / EPA

“The restructuring will primarily be aimed at dividing Evergrande’s liabilities among stronger firms, so that a thinner unit can still be traded or phased out.”

Löwy adds that there is a “real chance” for Beijing to step in to help regular local citizens, investors, employees and suppliers.

“I can easily see that the government is involved financially or from an administrative point of view, to make sure that these people are protected. It could even be extended to local creditors, ”he said.

“I don’t see that extending to overseas bondholders and creditors, but certainly to suppliers, home buyers and employees.”

Löwy also speculated that if Evergrande had stopped paying its employees, it was potentially an effort to pressure Beijing to intervene.

Chen is not concerned about the risk of his investment and is confident that he will get his apartment. “The sooner the better, for me. If they deliver it later, I don’t think it matters either, ”he said. But what if they don’t deliver it at all? “I will let it be. I already bought the apartment, there is no use being angry about it. “

Additional agency reports

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