Tuesday, October 19

Will Evergrande go bankrupt? If that happens, what will happen?

What is Evergrande?

Real estate developer Evergrande Real Estate – or Hend Da Group in Chinese – owns more than 1,300 real estate projects in more than 280 cities across China. Founded in southern China in 1996 by former metallurgical businessman Xu Jiayin, today it is the second largest real estate developer in the country. Their businesses range from real estate development to capital management. She is also a well-known name for Chinese fans as she owns the country’s largest soccer team, Guangzhou FC.

This thriving company, which has tapped into many sectors of China’s growing economy, has also made Xu one of the wealthiest members of the Chinese business elite: According to Forbes magazine, Xu’s personal fortune stands at around $ 10.6 billion. Dollars.

Why is Evergrande in trouble?

In short: ever-increasing debt and changing regulations.

Evergrande’s troubles came after years of limitless expansion, during which its debts grew in line with its size and assets. Now it carries an accumulated debt of more than 300,000 million dollars.

Some analysts say Evergrande is currently the world’s most indebted real estate developer. It is expected that this Thursday the company will pay interest for 84 million dollars on the debt of its bonds offshore, but lenders are not very calm about it.

The promoter is also a victim of the government’s policy change for the administration of the gigantic Chinese economy. Shortly after his inauguration in 2013, President Xi Jinping said that China needed to “change the focus to improve the quality and returns of economic growth and seek genuine and not inflated GDP growth.”

Reducing debt has become a central element of Xi’s efforts to minimize systemic risks. Easier said than done, but Beijing has been trying. For example, last year you introduced the so-called “three red lines“for some select real estate companies, by which he imposed a severe limit on the amount of money that these companies can access through a loan.

In theory, the new regulations would force the entire real estate sector to deleverage to improve its financial well-being. Initially, some gave the go-ahead to this intervention. Earlier this year, the Swiss bank UBS He said: “We are fully confident in the scope of these measures.”

In reality, things seem to be unfolding in a haphazard way. Before the recent chaos, Evergrande had offered its properties at discounted prices to ensure liquidity to keep the business afloat. But the party is over and buyers have lost confidence in an inflationary housing market poised for a price reset.

Evergrande also pressured its staff to lend it money. They presented the loans as high-yield investment schemes, but those who didn’t get involved risked losing their bonds. This month Evergrande stopped reimbursing the investment to its employees, who are now protesting in the street outside the company’s offices, demanding their money back.

Evergrande’s share price fell more than 80% this year. Likewise, the risk rating agencies have lowered the credit rating of their bonds.

What does this mean for China and its economy?

The government’s greatest fear is that a possible contagion effect will hit the Chinese macroeconomy. The deteriorating geopolitical relationship with the West and COVID-19 – as well as the strengthened ideological campaign that seeks to reaffirm the economic clout of the ruling Communist Party – have already raised fears of a possible sustained slowdown in the world’s second-largest economy.

Evergrande also owes money to around 171 local banks and 121 other financial entities. Therefore, if the company ceases payments entirely, there will be consequences for the banking system. Some analysts fear that what follows is a credit crunch, which would be bad news for China and the global economy.

UBS estimates that there are 10 developers in potential risk positions, whose sales contracts total 1.86 trillion yuan – 2.7 times the size of Evergrande. In other words, Evergrande is just the tip of the iceberg.

The government faces a dilemma. If you intercede to rescue Evergrande, what message will you give to other promoters with huge debts? But if it doesn’t help, the collateral effects could spread to other sectors of the economy.

What are the international implications?

Short answer: hard to tell. No one could really foresee the implications of the collapse of Lehman Brothers a decade ago. Not everyone thinks so: “An Evergrande ‘default’ could be a disaster for real estate,” Barclays analysts say in an article. “But we think it is far from a ‘Lehman moment’ in China.”

Jimmy Chang, chief investment officer at the Rockefeller Global Family Office, believes the domino effect could extend beyond China. Chang explained to the BBC: “If China had a serious economic problem due to Evergrande, the rest of the global economy would be affected by it.”

Foreign holders of Evergrande’s dollar bonds – totaling roughly $ 20 billion – don’t have much to do in this situation and analysts say they could go bankrupt. They are likely to try to get their money back in international courts.

On Monday the markets took a scare with the fall of 1.7% of the US S&P, after Evergrande closed 10% down in Hong Kong, the lowest price since May 2010. But the following day the index of Hong Kong stock benchmark Hang Seng bounced and closed the day with gains of 0.5%. S&P also made up lost ground.

Will Evergrande collapse?

The company is expected to close. However, if managed well, the process could give force to Xi’s proposed reform of the Chinese economy.

“We think it is difficult for Evergrande to meet its obligations,” says Tao Wang, chief China economist at UBS. “Project delivery will be the most important thing from a social stability point of view. Property buyers and suppliers come first.”

“One possibility, we believe, is that the group’s project companies are segregated to ensure that the value of their assets materializes and that the cash flow is used only for project construction. Furthermore, we believe that they will be necessary. a debt restructuring and an asset value cut, “he adds.

How do you see the situation in China?

In China, Evergrande is expected to not get the full support of the government. The editor of The Global TimesHu Xijin said last week that Evergrande should not take it for granted that the government would bail it out for being “too big to fail.” But many Chinese families have bought off-plan homes from this realtor. They may lose their deposits if the business goes bankrupt.

Soccer fans may also be disappointed. As Evergrande’s story progresses, Guangzhou FC also seeks government help. According to Bloomberg, the government in Guangdong is seeking a 10% stake and a state-owned company may step in to provide further assistance.

Translation by Julián Cnochaert.


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