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Evergrande at the Forefront of China’s Property Debt Crisis

Evergrande, China’s second-largest property developer, has been drawing a lot of attention in recent months as it sits on the verge of collapse, threatening to default on payments of its mounting debt. 

The real estate giant, founded in Guangdong in 1996 by billionaire Xu Jiayin, owns more than 1300 projects in over 280 cities across China. The firm operates subsidiaries across a range of sectors, including electric vehicles (Evergrande New Energy Auto), an internet and media production unit (HengTen Networks), a theme park (Evergrande Fairyland), a soccer club (Guangzhou F.C.) and a mineral water and food company (Evergrande Spring), to name a few.

Whereas the company’s monumental growth and diversification is largely attributable to creditor and investor confidence, it seems Evergrande may have accumulated more debt than it can pay back. With US$300 billion [JW1] in liabilities, mainly in bonds held by a myriad of banks, and $120 billion in debts to various other creditors, failure seems imminent for Evergrande. As such, rating agency S&P downgraded Evergrande to “CC” from “CCC” a few weeks ago, thereby signaling the company’s poor outlook and warning investors of a probable debt restructuring scheme ahead. Amid this unsustainable indebtment, the company, which had already lost 80 per cent of its share value since the beginning of the year, announced earlier this fall that it would be unable to make its payments due on September 29. Granted a 30-day grace period before its bonds expired, Evergrande finally managed to pay US$83.5 million at the end of October, covering its overdue sum to bond holders and honouring its interest payment for the month, thus saving itself in extremis from default. The company repeated similar feat last week, once more dodging default at the very last minute, by paying its  US$148 million interest payment that was due on November 11. Nevertheless, this only bought Evergrande limited time and it is already facing problematic payment deadlines again, including on its foreign bonds set to expire later this month and in December.

Given Evergrande’s significant involvement in China’s housing market, among other sectors, its downfall poses a serious contagion risk to the financial system and banking sectors in China, as well as globally, with potential consequences in international markets. This problem is not limited to Evergrande. Kaisa, another real estate giant and rival of Evergrande, also had their credit rating downgraded to CCC- amid their own liquidity crunch. Investors now fear that this might only be the start of a widespread property debt crisis in China. That said, the Chinese housing market has seen many ups and downs and debt crisis have been averted in the past.

The timing of the Evergrande troubles is particularly problematic due to an economic slowdown in China, sweeping crackdowns on its private sector, and ongoing tensions with the United States. Considering the impacts of a potential default, most analysts believe that Evergrande is ultimately too big for the Chinese government to ignore. The possibility of a government bailout is looming, though in times where the Chinese government juggles stability and growth, Beijing must be extremely cautious in the extent of its support to a private company such as Evergrande. On the one hand, many investors have given money to Evergrande and like companies partly because they believed that the Chinese government would always come to its rescue when the company is on the verge of collapse, as it has many times throughout China’s economic boom. On the other hand, however, to stop digging China’s unsustainable debt problem deeper, the government has recently started to shift toward a more laissez-faire approach by letting more companies fail.

In the case of Evergrande, there are few possible scenarios: the government could ask a public company to buy Evergrande and restructure it. Alternatively, since China’s political system gives regulators coercive power over issuers, investors, and intermediaries, who are in fact often owned or influenced by the government itself, Beijing could likely contain the crisis by “forcing collaborations” among stakeholders. Another option would be for the government to let the company go bankrupt and step in afterwards to help the citizens and firms who have been impacted by, for example, reimbursing the costs they had incurred in their housing projects. However, in line with the more laisser-faire approach, Chinese authorities have just recently suggested that Evergrande’s billionaire founder could very well use his own money to pay down the company’s debt. Although Mr. Xu’s shrinking wealth would be merely a drop in the bucket to repay the company’s debt. 

All in all, whether the state will let the Evergrande sink, or save it, fully or partly, is still the object of speculation. The situation is evolving every day, though it could take years to get Evergrande’s debt under control; and, as we see other Chinese giants heading in the same direction of Evergrande, we are surely not done hearing about this crisis.

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