Evergrande fiasco could hit Chinese economy: NPR
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A real estate developer in China could go bankrupt. And that may not sound like a big deal, but NPR’s Emily Feng reports that the company is at the center of such debt that its collapse could set off a chain reaction of defaults.
EMILY FENG, BYLINE: I’m in a half-finished villa. The marble floors are covered in dust. And although the chandeliers have already been installed, the entire mansion is still missing its doors. The house is part of the Taicang Cultural City Project and was built by Evergrande, one of China’s largest real estate developers. But now the construction has stopped.
MAO KAI: (Speaking a language other than English).
FENG: Mao Kai, a real estate agent, tells me that all the units are sold, although it is not clear if they will ever be completed. Buying property is everything in China. It serves as a dowry for the marriage and allows access to the best public schools. And it has generated huge returns for the middle class. More than 70% of urban wealth is real estate. That’s why Shanghaier (ph) Penelope Wu and her husband splurged for a $ 200,000 one-bedroom Evergrande apartment here. There was so much competition last year that she offered to pay the full cost upfront in cash before Evergrande even broke new ground.
PENELOPE WU: (Via interpreter) I had no idea then that Evergrande was in desperate need of the money. Never mind. Buying property is like betting on stocks. You win and you lose.
FENG: Now she’s waiting for Evergrande to finish building her apartment, along with 1.4 million other units the developer has pre-sold. But the developer has no more money to continue building. Wu is hoping the government will step in to save Evergrande or at least make sure he finishes building the homes he has already sold.
WU: (Via interpreter) Evergrande is too big to fail. Even if it went bankrupt, the government would step in to save it.
FENG: Angry and worried investors are already picketing the Evergrande headquarters. They bought investment products from Evergrande which now seem worthless as its stock has lost almost 90% in value this year.
NIGEL STEVENSON: Well, now it looks like the day of the accounts is just around the corner.
FENG: Nigel Stevenson is a Hong Kong-based analyst at GMT Research, and he’s been following Evergrande for years. He became one of the biggest Chinese developers by playing a risky game, selling bonds and borrowing money at double-digit interest rates to finance new projects, which he then sold. just in time to pay off debts and take out new loans.
STEVENSON: So it’s always been able to kind of postpone the pain day kind of day in a way. And in the meantime, the type of assets and the balance sheet were getting bigger and bigger. And in a way, the problem just got bigger and bigger.
FENG: The problem started at the beginning of this year. COVID has slowed down real estate purchases. New policies limited the number of homes people could buy, and much stricter limits on the amount of debt developers could take on. This is Bo Zhuang, chief China economist at investment firm Loomis Sayles.
BO ZHUANG: It’s part of China’s long-term debt reduction, risk reduction. At the start of this year, it was, like, very rigorously implemented. So that’s the key factor.
FENG: That’s what the Chinese state wants. He’s had enough of risky developers like Evergrande taking out loans they can’t repay and selling apartments that no one needs just to raise house prices. So China is forcing Evergrande and others to repay their debts. Next, he wants local governments to reduce their financial dependence on the sale of land for profit. The question is, could pushing Evergrande to get in shape really destabilize the entire economy?
ZHUANG: In Chinese it is said to kill chickens to scare the monkeys – but the point is, maybe they’re trying too hard to kill the chickens, but all the monkeys are scared.
FENG: It’s possible that Evergrande will miss interest payments on bonds this month, and buyers are so scared of Evergrande that other developers are now seeing property sales plummet and stock prices plunge. which could trigger more faults.
ZHUANG: Household confidence in buying a new property – (unintelligible) this pre-sale property – is deteriorating very quickly. If my mom knows the story of Evergrande, it means everyone knows the story of Evergrande.
FENG: Evergrande doesn’t just owe banks loans. He also has liabilities, like unpaid invoices totaling around $ 370 billion that he owes to contractors and suppliers who could also go bankrupt if Evergrande defaults. One of those entrepreneurs is Nantong Sanjian, who was supposed to complete the Taicang Evergrande project. Here is one of its managers, Sheng Weixin.
SHENG WEIXIN: (While performing) The past two days have been filled with endless brawls with the police and with desperate buyers. Evergrande doesn’t have the money to reimburse us, so we also fight with the renovators and other contractors.
FENG: Sheng’s face wan with worry. He has already sent all his workers home because he cannot afford to pay them.
SHENG: (While performing) We still owe our workers three months’ wages. Our own business is also at risk of going bankrupt.
FENG: Sheng points out the concrete and steel skeletons of nearly a dozen unfinished Evergrande projects that surround us.
SHENG: (non-English language spoken).
FENG: He’s waving a bunch of towers to our east, which another developer agreed to bail out in July, only to deal with debt issues themselves. Government regulators are now seeing if other developers can buy out Evergrande before its financial problems spill over into China’s real estate industry. But they also appear fragile, and Beijing is running out of time to contain the economic fallout.
Emily Feng, NPR News, Taicang, China.
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