The Chinese economy threatened by the debt problems of a real estate giant
Every now and then a business becomes so big and messy that governments fear what would happen to the economy as a whole if it failed. In China, Evergrande, a sprawling real estate developer, is that company.
Evergrande has the distinction of being the most indebted real estate developer in the world and has been on life support for months. A steady drumbeat of bad news in recent weeks has accelerated what many experts warn is inevitable: failure.
Rating agency Fitch said this week that the default “looks likely.” Moody’s, another rating agency, said Evergrande was strapped for money and time. Evergrande faces over $ 300 billion in debt, hundreds of unfinished residential buildings, and angry vendors who have shut down construction sites. The company even started paying overdue bills by selling unfinished properties.
Observers are watching to see if Chinese regulators keep their promise to clean up the country’s corporate sector by letting “debt bombs” like Evergrande fall.
How did Evergrande become such a problem?
In its heyday ten years ago, Evergrande sold bottled water, owned China’s best professional soccer team, and even took a brief interest in pig farming. It has grown so big and sprawling that it even has a unit that makes electric cars, although it has delayed mass production.
Today, Evergrande is seen as a rocky threat to China’s biggest banks.
The company, which was founded in 1996, took advantage of China’s epic real estate boom that urbanized vast swathes of the country and resulted in nearly three-quarters of household wealth tied up in housing. This has placed Evergrande at the center of power in an economy that has relied on the real estate market for supercharged economic growth.
Its billionaire founder, Xu Jiayin, is a member of the Chinese People’s Political Consultative Conference, an elite group of politically well-connected advisers. Mr. Xu’s connections likely gave creditors more confidence to continue lending money to Evergrande as she grew and developed into new businesses. Eventually, however, Evergrande found himself with more debt than he could afford.
In recent years, she has faced lawsuits from homebuyers who are still awaiting completion of apartments they have partially paid for. Suppliers and creditors have claimed hundreds of billions of dollars in unpaid bills. Some have suspended construction on the Evergrande projects.
Much of the money Evergrande has been able to raise comes from pre-sold apartments that have yet to be completed. Evergrande has nearly 800 unfinished projects across China and up to 1.2 million people still waiting to move into their new homes, REDD Intelligence research shows.
Evergrande cut prices for new apartments, but even that failed to attract new buyers. In August, it had a quarter of sales less than a year ago.
Will regulators step in to save it?
Beijing will be tempted to say ‘no’, but a collapse could cause serious damage, leaving domestic owners, suppliers and investors – potentially millions – unhappy. And Beijing has finally decided to support other large companies that have encountered big problems in the past.
For years, many investors gave money to companies like Evergrande because they believed that in the end Beijing would always step in to save it if things got too volatile. And for decades, investors have been right. But in recent years, authorities have shown a greater willingness to let companies go bankrupt in order to bring China’s unsustainable debt problem under control.
Source: Trade Standard, NYT