POLITIZE

Text written by Economics student Pedro Fontana 

With debts accumulating more than 300 billion US dollars, Evergrande is currently the real estate developer with the most debt in the world and is on the verge of a widespread collapse, which could take the Chinese real estate market with it. The company has put global markets against the wall and its difficulties could have major repercussions for investors around the world, but how did it achieve 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 dollars 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 business into the food sectors, electric vehicles, theme parks (Evergrande Fairyland), streaming services and even a football team (Guangzhou FC).

DEBT

Keeping pace with China's growing real estate market, Evergrande, aiming to buy more assets and increase its operations, began aggressively borrowing from major banks, institutional investors, bondholders and homebuyers through pre-sales of unfinished apartments . Evergrande took on a debt of 300 billion dollars to continue developing its operations, which currently cover more than 1300 projects in 280 Chinese cities.

THE CRACKDOWN

The company's problems began when pandemic lockdowns hampered property sales, increasing the price of materials and labor, as well as disrupting supply chains. Furthermore, in August 2020, the Chinese government decided to impose regulatory control over the real estate market, and introduced a series of regulations, called the “three red lines”, used to measure a company's debt tolerance, a different set of restrictions would be imposed on each “line” violated. Evergrande once and for all violated all of the “three red lines” and was prevented from taking on new loans. As a result, it had to slow down its operations throughout China.

EVERGRANDE’S CURRENT SITUATION

Evergrande is currently paralyzed. They do not have the resources to finish their projects that have already started to be built. Its shares have fallen more than 90%, and the company owes back payments to more than 70,000 investors. More than a million project buyers are in limbo, waiting for unfinished apartments that could now be worth absolutely nothing. The real estate developer recently missed the deadline for two important interest payments on US dollar bonds, however, the missed payments may not necessarily trigger a default because each of them has a 30-day grace period before the failure to pay is considered as one.

AND NOW?

Evergrande's big problem has hit financial markets around the world, and international investors are worried about the possibility of a billion-dollar default as well as the collapse of the Chinese real estate sector, which now accounts for more than 25% of China's total economy. Many investors hope that China will be able to pull Evergrande out of the bottom, given its history of state interventionism in the economy, others are pessimistic about the Chinese government's positions, which will probably prioritize domestic investors over international ones.