Evergrande’s debt wakes up the Chinese economy
Emily Feng, writing in NPR, said buyers of around 1.4 million Evergrande units across China are now uncertain whether the properties they paid for will ever be built.
Dozens of angry and worried investors have been picketing the Evergrande headquarters in the southern city of Shenzhen for weeks. They had bought investment products from Evergrande which now appear almost worthless as its Hong Kong-listed stocks have fallen nearly 90% in value this year.
Evergrande is in default on at least a tranche of bond interest payments totaling around $ 120 million, due in late September.
The struggling developer, China’s second-largest sales volume last year, is grappling with debt it can’t pay off. She owes a total of $ 368 billion in loans to banks, as well as debts to contractors and suppliers, said Emily Feng.
The financial difficulties run counter to the two competing goals of the Communist Party of China: to force the Chinese private sector to move away from the speculative and risky lending practices that have pushed debt to dangerous levels, while avoiding financial collapse and collapse. 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 tax reform aimed at reducing risk, reducing debt and moving away from [local government] land finance. Both of these goals are a good thing, “said Bo Zhuang, chief economist for China at Loomis Sayles, an investment firm.” But there is a risk of further spillover to other developers, potentially causing a crisis. banking or a debt crisis. ”
For nearly three decades, Evergrande – like dozens of Chinese developers – has bet big on China’s booming infrastructure construction. He took out loans that often carried double-digit interest rates and bet his sales of new build apartments would be high enough to pay off growing debt, NPR reported.
Financial regulators have tolerated these risky lending practices because of how developers like Evergrande have helped generate huge amounts of real estate wealth, as well as land sales income for local governments while transforming properties. millions of citizens as owners.
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 raise house prices. .
Policymakers have also indicated that they will push local governments to reduce their financial dependence on the sale of land for a fee, one of the main drivers of China’s real estate boom, said Emily Feng.
An economic slowdown caused by the COVID-19 pandemic was already weighing on real estate purchases. Then last summer, new government policies to curb speculative investment restricted the number of homes people could buy. These rules have taken some buyers by surprise.
“We only learned about 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 the Evergrande Taicang project when she already owned a second home in the city.
His purchase 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.
Last year, Beijing also implemented its “three red lines” policy, with the number referring to three strict ceilings imposed on the ratio of debt a real estate developer can hold to its assets, its equity. and its liquidity.
Under this combination of new rules, Evergrande couldn’t sell enough apartments fast enough to pay off debts at the pace imposed by regulators, Emily Feng said.
One question is whether pushing Evergrande to get back into shape can really destabilize the entire Chinese banking system. Buyers are so scared of Evergrande that other developers are now seeing lower property sales and falling stock prices, which could trigger more property defaults in China.
Global equity markets have also been rocked by the uncertainty. This month, the Dow Jones Industrial Average had its worst performance since July, and the S&P 500 and Nasdaq composite were at their lowest since May.
Government regulators are now trying to find other companies that can buy out Evergrande and its assets before its woes spread. But they lack the time to contain the potential economic fallout.
This is because Evergrande owes more than loans to banks. It also has unpaid bills totaling around $ 300 billion owed to contractors and suppliers – who are now also facing economic hardship, NPR reported.