• Shipra Swaraj

China's Evergrande - Big Crash Shakes World Market

China's property developer Evergrande's implosion rattles the real estate sector, as it racks over $300 Billion worth of debt.



Background


Evergrande is one of the most valuable yet indebted property developers in the world and 2nd largest real estate company in China. Earlier known as Hengda Group, it is one of the biggest property developers of China by sales. The company was founded in 1996 by a Chinese billionaire businessman Hui Ka Yan in Southern China. According to the Forbes billionaire list, Hui, the largest shareholder of China's Evergrande Group, is also the 53rd richest man in the world. However, in his earliest days, he worked as a technician in a steel company for 10 years.


Years afterward, he was assigned the job of a salesman in another company. Now, his work was being appreciated, and his brilliant ideas in management were being praised. He kept on switching jobs from one position to another higher one, but he was not satisfied with what he had achieved. After several years of working for others, he finally decided to put money into real estate, and that is when Evergrande came into existence.


Currently, it is headquartered in Shenzhen, Guangdong of China. Although at one point, the company was ranked 122nd on the Fortune Global 500, currently the company is struggling to outlast the credit crunch.


How big is Evergrande Company?


Evergrande is a huge empire that owns more than 1,300 residential projects across more than 280 cities in China. It generates employment on a large scale and employs around 2,00,000 people each year.


It is a multifunctional, multi-industry, and digital technology enterprise that owns real estate development, network, new energy, health, property service, and other industries and mainly conducts businesses in China.


Its operations involve constructing theme parks, electric cars, hotel operations, finance business, internet business, etc. It had also bought a soccer team named Guangzhou Football Club, which is now dependent on government aid to survive and is on the verge of collapsing due to the inefficiency of Evergrande to provide it with financial support.


Why is Evergrande in trouble?


Evergrande expanded its business strenuously to become one of China's largest companies by borrowing more than $300 billion from 171 banks and 121 financial firms, which is 2% of China's GDP, at the same time competing with Jack Ma to get the title of Asia's richest man.


Unfortunately, it could not sustain the government's new lending measures and could not grow faster than the rate at which it accumulated debt from different sources. Lack of liquidity and short maturity dates were other major reasons for the company's downfall.


The company piled up a reasonable amount of debt with short maturity dates. More than 700 projects were yet to be finished, and the company was already low on cash as its assets (real estate) do not generate quick cash.


Eventually, it had to offer its properties at major discounts to ensure money was coming in to keep the business faring well. At present, it is struggling to meet its liabilities and save its empire.


The fallout of Evergrande Group


Until 2020, China's biggest real estate developer was Country Garden Holdings, which very soon was replaced by Evergrande. Unfortunately, the company couldn't survive heavy debt and strict lending policies formulated recently and teetered on the edge of collapse.

In 2000, Hui Ka Yang, a successful businessman thought of trying his luck in real estate due to the relaxation in the rules and structural boom in the real estate sector at that time. Due to easily available financial loans by banks, Evergrande did heavy investments in real estate and started building apartments all over China.


It successfully made the cut and came a long way and became one of the most successful property developers in the world. Although the company obtained a large number of loans from financial institutions, it is now on the brink of collapse as it couldn't settle the liabilities.


At present, it's a debt-ridden company with $300 billion in debt from more than 171 banks and 121 financial firms. It also failed to meet China's Three Red Lines and started scrambling to meet the liabilities within the deadline. The fallout of the Evergrande Group is being compared to the collapse of the U.S. investment bank Lehman Brothers in 2008.


As a result, Evergrande attempted unsuccessfully to sell off some of its businesses, as evidenced by a leaked letter from Evergrande to the government in September 2020, asking for assistance as they faced a cash crisis, which sparked increased investor concern. An estimated two-thirds of Evergrande's obligations are to homeowners who pre-paid for nearly 1.4 million undeveloped residential properties.

In addition to the $300 billion debt, Evergrande must deal with hundreds of unfinished residential buildings and irate suppliers who have shut down construction sites. The company has now begun to hand over unfinished properties to pay its past-due bills. It tried to pay them in apartments and land, and some people agreed.


However, the majority of people wanted their money back. It has even requested that its employees lend money. The Chinese government has already asked Evergrande Group's chairman to use some of his wealth to pay the money to his bondholders.


Impact of Evergrande collapse on China


With over 1,300 real estate projects and 7.3 billion square feet of contracted land, Evergrande's possible collapse has experts worried that it could rattle the entire Chinese economy in one fell swoop.


According to the National Bureau of Economic Research (NBER), real estate contributes to 30% of the Chinese economy, so the downfall of this company affects the Chinese government on a large scale. This economic crisis will have a far-reaching impact on the Chinese economy. Evergrande borrowed money from 171 local banks and 121 financial firms. So now, the Chinese credit market may witness a crunch in cash flow which would eventually lead to a serious economic crisis in China.


The downfall of the company would also eventuate in the lack of financial investments in the Chinese market due to restricted lending to civilians by banks. Common people are going to suffer the most. Evergrande makes about six lakhs houses/apartments every year that's bought by people as their home or as an investment. Now, families and businesses would find it harder to borrow money which would eventually result in a serious financial crisis all over China due to the frozen credit market and unavailability of cash in the banks.


Therefore, it won't just cause problems for the property sector, but it might also affect the Chinese overall financial system.


Domestic politics


On the one hand, it looks like Evergrande failed to meet its liabilities before the deadline and is now facing the consequences, but on the other side seems like it's more to the story than that. Another side of the story says it is all happening with the consent of the Chinese government, which is trying to set an example out of Evergrande for other companies.

We all saw what happened to Alibaba Group, a Chinese multinational technology company. Now, Hui's empire is turning into President Xi Jinping's next victim. His recent reforms in lending regulations are an effort to curb the debt-fuelled excesses of real estate companies to strengthen the anti-monopoly push and defuse risks in the nation's housing market.


More than 100 new business rules were imposed on companies by the president that directly affected the disorderly expansion of capital by such companies.


Evergrande and its affiliated companies were built through an aggressive mix of dollar debt issuance, share sales, bank loans, and shadow financing -- funding avenues that have been all but cut. The group is currently facing the largest debt restructuring in Chinese history. China's property tax plan is part of Xi Jinping's so-called shared prosperity campaign to redistribute wealth and address growing social inequality. At the end of the five-year pilot program, both residential and non-residential properties are taxed by value, except for rural households.

Now the government is targeting civilians who've bought apartments, houses, etc., investors, stakeholders, suppliers, banks, and credit markets and trying to help them anyhow. The company has been taking steps to raise the money it owes to people; however, there is nobody who could bolster its broken will.


It even resumed work on many projects in China. But unfortunately, its many global projects are still at risk. Also, the money of its stakeholders, investors and buyers along with the company's future is still at stake.


Takeaways


The property-driven growth model of China led to the Evergrande Crisis. This may or may not cause serious financial turmoil in the Chinese economic system, but it has been foreshadowed that this property crisis is going to oil the wheels of a wrecked credit market and economic meltdown in China for quite a while.


Nevertheless, the breakdown of Chinese property giant Evergrande was not entirely unanticipated. Real estate companies that pile up a fairly large amount of debt with short-term liabilities consecutively while trying to aggressively expand are always on the verge of collapse.

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Shipra Swaraj is a Political Science graduate from Patna University, in India. She is also a content writer and activist at the International Youths Organization for Peace and Sustainability.


Inputs and Edits by Dib Hadra.