POLITIZE
Text written by Economics student Pedro Fontana
With debts exceeding $300 billion, Evergrande is currently the most indebted real estate developer in the world and is on the verge of widespread collapse, potentially dragging the Chinese real estate market down with it. The company has put global markets against the wall, and its difficulties could have major repercussions for investors worldwide, but how did it manage to get into all this?
Is Evergrande too big to fail?
Evergrande was originally founded in 1996 and has since become the second-largest real estate developer in China. With over $360 billion in total assets, its core business specializes in residential construction, hotel operations, finance, and the healthcare industry, but over time, the company has diversified its operations into the food, electric vehicle, theme park (Evergrande Fairyland), streaming services, and even a football team (Guangzhou FC) sectors.
DEBT
Following the growing Chinese real estate market, Evergrande, aiming to acquire more assets and expand its operations, aggressively borrowed from major banks, institutional investors, bondholders, and homebuyers through pre-sales of unfinished apartments. Evergrande has taken on $300 billion in debt to continue developing its operations, which currently encompass more than 1300 projects in 280 Chinese cities.
CRACKDOWN
The company's problems began when pandemic lockdowns hampered property sales, increasing the price of materials and labor, and disrupting supply chains. Furthermore, in August 2020, the Chinese government decided to impose regulatory control over the real estate market, introducing a series of regulations known as the "three red lines," used to measure a company's debt tolerance; a different set of restrictions would be imposed for each "line" violated. Evergrande violated all three "red lines" and was prevented from taking out new loans. As a result, it had to slow down its operations throughout China.
CURRENT SITUATION OF EVERGRANDE
Evergrande is currently paralyzed. They lack the resources to finish projects that have already begun construction. Their stock has fallen by more than 90%, and the company owes overdue payments to more than 70.000 investors. Over a million project buyers are in limbo, waiting for unfinished apartments that could now be worth absolutely nothing. Recently, the real estate developer missed the deadline for two important interest payments on US dollar-denominated bonds; however, the missed payments may not necessarily trigger a default, because each payment has a 30-day grace period before the non-payment is considered a default.
AND NOW?
The major problem at Evergrande has impacted financial markets worldwide, and international investors are worried about the possibility of a multi-billion dollar default, as well as the collapse of the Chinese real estate sector, which already accounts for more than 25% of China's total economy. Many investors hope that China will be able to pull Evergrande out of the crisis, given its history of state intervention in the economy; however, others are pessimistic about the Chinese government's stance, which will likely prioritize domestic investors over international ones.
