Evergrande fiasco could hit China’s economy: NPR

The half-completed apartment towers are part of Evergrande’s Cultural City real estate project in Taicang, China. The company has run out of money to complete the buildings as regulators force developers to pay off debts.

Emily Feng/NPR

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Emily Feng/NPR

The half-completed apartment towers are part of Evergrande’s Cultural City real estate project in Taicang, China. The company has run out of money to complete the buildings as regulators force developers to pay off debts.

Emily Feng/NPR

TAICANG, China – The one-bedroom apartment was meant to be Penelope Wu’s retirement home, an escape from the hustle and bustle of Shanghai – or, at least, that’s how Chinese property developer Evergrande painted. To line up in front of hundreds of other potential buyers, Wu paid the list price of around $200,000 in full last year, before construction had even started.

“It struck me as odd that Evergrande wanted the money upfront. I didn’t realize then that they were so desperate for money,” Wu said as he walked his dog past his unfinished building in the project. the cultural city of Taicang. The mixed-use development project, an hour’s drive from Shanghai, has been halted mid-construction as Evergrande struggles to reduce debt under orders from Chinese regulators.

Wu and the buyers of about 1.4 million Evergrande units across China are unsure whether the properties they paid for will ever be built.

Dozens of angry and worried investors have been picketing Evergrande’s headquarters in the southern city of Shenzhen for weeks. They bought Evergrande investment products that now look nearly worthless as its Hong Kong-listed stock has fallen nearly 90% in value this year.

Evergrande is set to default on at least one tranche of bond interest payments totaling about $120 million, due at the end of September. (He said Wednesday he had “resolved” a payment of more than $35 million on onshore bonds, but a second payment of more than $85 million on offshore bonds is due Thursday.)

The embattled developer, China’s second-largest by sales volume last year, is saddled with debt it can’t repay: it owes a total of $368 billion in loans to banks, as well as debts to subcontractors and suppliers.

The powerful former promoter’s financial woes highlight a clash between two competing goals for the Chinese Communist Party: to force China’s private sector away from speculative and risky lending practices that have pushed debt to dangerous levels, while avoiding a financial collapse and the collapse of the real estate sector. , in which more than 70% of the country’s urban wealth is locked up.

“This is part of a long-term fiscal reform aimed at reducing risk, deleveraging and moving away from [local government] land financing. Both of these goals are good,” says Bo Zhuang, chief China economist at Loomis Sayles, an investment firm. a debt crisis.

The company has engaged in risky practices for years

For nearly three decades, Evergrande – like dozens of Chinese developers – has been betting big on China’s booming infrastructure construction. She took out loans that often carried double-digit interest rates and bet that her sales of flats to be built would be high enough to pay off bloated debt.

Financial regulators have condoned these risky lending practices because of the way developers such as Evergrande have helped generate massive amounts of real estate wealth, as well as land sales revenue for local governments, while transforming millions of citizens into owners.

Evergrande has also adopted innovative ways to fund its ever-increasing debt, selling financial products to retail investors and occasionally to its own employees. She remained solvent even as her debts multiplied. Xu Jiayin, chairman of Evergrande, was ranked China’s richest man in 2017 as Evergrande’s stock price soared.

“Evergrande has always been able to put off the kind of pain day, and in the meantime, the share of non-performing assets on the balance sheet has gotten bigger and bigger, and in a sense, the problem has become bigger and bigger. bigger,” says Nigel Stevenson, a Hong Kong-based analyst at GMT Research who has tracked Evergrande for years.

This time Evergrande’s problems seem too big to ignore

In the cultural city of Taicang, the stalled Evergrande tourism and residential project, optimism prevails among some real estate agents and homebuyers that the developer will again secure enough last-minute financing or receive an extension of loans in course to continue to operate.

“Evergrande is too big to fail,” says Mao Kai, a Taicang real estate agent.

Wu, the home buyer, hopes the municipal government will step in to bail out local Evergrande projects or at least ensure the developer completes construction of the homes it has already sold.

“There is simply too much money and too many houses at stake to let a company the size of Evergrande fail. Failure would create too many social problems,” she says.

This time around, Evergrande’s problems may be too big to ignore. The Chinese state has firmly indicated that it will no longer allow developers like Evergrande to take out loans it cannot repay and sell investment apartments that no one needs just to drive up house prices. .

Policymakers also signaled they would urge local governments to reduce their financial reliance on selling land for profit, a key driver of China’s property boom.

An economic downturn caused by the COVID-19 pandemic was already driving real estate purchases. Then, last summer, new government policies aimed at curbing speculative investment limited the number of homes people could buy. These rules took some buyers by surprise.

“We only learned of the new limits after my mother had already signed a contract with Evergrande. If the company knew the rules at the time, why did they charge us for the apartment?” says a Shanghai resident whose mother bought a unit in Evergrande’s Taicang project when she already owned a second home in the city. Purchasing it is illegal under the new rules, which is why the resident asked NPR not to use his name. He is now trying to get his mother’s deposit back.

A day of accounts?

Last year, Beijing also implemented its “three red lines” policy, with the number referring to three strict caps on the ratio of debt a property developer can hold to its assets, equity and its cash.

Under this combination of new rules, Evergrande could not sell enough apartments fast enough to pay off its debts at the rate set by regulators.

“Now it looks like the day of reckoning is just around the corner,” says GMT’s Stevenson.

One question is whether pushing Evergrande to recover can actually destabilize the entire Chinese banking system. Buyers are so spooked by Evergrande that other developers are now seeing plummeting property sales and falling stock prices, which could lead to more property defaults in China. Global equity markets were also rocked by the uncertainty. This month, the Dow Jones Industrial Average posted its worst performance since July, and the S&P 500 and the Nasdaq composite were at their lowest since May.

“Household confidence in buying a new property is deteriorating very quickly,” says Zhuang, of Loomis Sayles.

The fallout is already apparent

Government regulators are now trying to find other companies that can buy out Evergrande and its assets before its woes spread. But they are running out of time to contain the potential economic fallout.

Indeed, Evergrande does not only owe loans to banks. It also has unpaid bills totaling around $300 billion owed to contractors and suppliers – who are now also facing economic hardship.

One such contractor is construction company Jiangsu Nantong Sanjian, which was supposed to complete Evergrande’s Taicang project, in addition to dozens of others across the country.

“The last two days have been filled with endless fights with the police and with desperate home buyers. Evergrande has no money to reimburse us, so we are also fighting with renovators and other contractors that we hired,” says Sheng Weixin, director of Jiangsu. Nantong Sanjian.

Ashen in the face of worry, he sits alone at his desk in the middle of an empty building lot in Taicang, trying to figure out his own future. He sent all of his employees, many of whom were migrant workers, home in August because he could no longer afford to pay them.

“What do we do with all our workers, the people of the countryside? We still owe them three months’ salary,” Sheng said.

He points to the concrete and steel skeletons of nearly a dozen unfinished Evergrande projects nearby – which another developer agreed to take over in July, only to face debt problems himself.

Without a payment from Evergrande or a bailout from the state, Sheng predicts his own company will likely go bankrupt within months. “That,” he said, “is no laughing matter.”

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