Evergrande, the second-largest property developer company in China is not in a position to repay its debt of $300 billion. The company is part of the Global 500 — meaning that it’s also one of the world’s biggest businesses by revenue.
The Evergrande empire
Chinese billionaire Xu Jiayin founded Evergrande in 1996 and sold bottled water. Later, the firm expanded to several areas, including pig farming and owning a football club, but what Evergrande is known for worldwide is its real estate business. The company also forayed into making electric cars and wealth management.
Evergrande Group is China’s second-largest property developer in terms of sales in more than 250 cities. In 2020, it recorded a gross profit of nearly $19 billion and in 2019, it was ranked 138th in the Fortune Global 500 list.
At its peak in 2019, Evergrande’s market cap was over US $50 billion. Even today, the company owns 2 percent of all newly constructed real estate in China.
What is the crisis?
As part of Chinese President Xi Jinping’s policy to crack down on big firms in China, more than 100 regulations were imposed on businesses that raised huge money via equity funds, borrowings, and IPOs in 2020. One of these laws sets a very strict cap on borrowings of companies.
While many Chinese firms took a financial hit due to this cap, Evergrande was one of the worst affected as it has borrowed upwards of $300 billion, which includes $19 billion in offshore US dollar-denominated bonds. The company has not just borrowed to run its real estate business but it also holds the money that people invested in its wealth management business.
With such huge debts, come huge interest payments. However, it looks like the company may default on its debt. Once the shares of Evergrande lost steam due to the cap on borrowings, people who had invested in its wealth management business started asking for their money back. Those who had pre-deposited money to buy flats — that are not yet constructed — also asked Evergrande to either give them the possession of a flat or return their deposits. At present, Evergrande is faced with nearly 800 unfinished residential buildings, many unpaid suppliers, and more than a million people who paid deposits to buy flats.
As troubles mounted for the company, its shares melted significantly. Today, Evergrande’s market cap is down to $4.9 billion, losing nearly 90 percent of its value. Now, Hong Kong billionaire Joseph Lau’s company, a major shareholder in Evergrande Group, has also hinted at plans to sell all of his stock in the ailing Chinese property developer.
Meanwhile, Evergrande has issued a statement saying, “Shareholders of the company and other investors should note that it is uncertain whether the Group could successfully implement the measures to ease the liquidity issues as mentioned in this announcement. Shareholders of the company and other investors are reminded to exercise caution when dealing in the securities of the company.”
How is it trying to move forward?
Evergrande in a filing with the Shenzhen Stock Exchange that issues regarding a payment on a domestic yuan bond have been “settled through negotiations.” The amount of interest it owed on the bond is about 232 million yuan ($36 million), according to data from Refinitiv.
While the news may placate investors, many questions still remain unanswered. Evergrande did not elaborate on the terms of the payment in its statement, and interest worth $83.5 million on a dollar-denominated bond also fell due Thursday. That deadline came and went without an update from the company.
On September 14, Evergrande announced that it had brought on financial advisers to help assess the situation.
While those firms are tasked with exploring “all feasible solutions” as quickly as possible, Evergrande has cautioned that nothing is guaranteed.
So far, the conglomerate has struggled to stem the bleeding, and has failed to find buyers for parts of its electric vehicle and property services businesses.
As of that filing, it had made “no material progress” in its search for investors, and “it is uncertain as to whether the group will be able to consummate any such sale,” it said.
The company has also been trying to sell off its office tower in Hong Kong, which it bought for about $1.6 billion in 2015. But that has “not been completed within the expected timetable,” it said.
How are investors reacting?
Evergrande’s problems spilled onto the streets this monthwhen protests broke out at its headquarters in Shenzhen. Footage from Reuters showed scores of demonstrators at the site last week,accosting someone identified to be a company representative.
But shareholders have been wary for months: The stock has shed nearly 85% of its value this year.
What could happen next?
The Chinese government appears to be starting to intervene.
Over the past few days, the People’s Bank of China has injected some cash into the financial system, to help boost liquidity in the short term and settle nerves.
According to Bloomberg, the net injection for banks was 460 billion yuan ($71 billion) sometime this week, including 70 billion yuan ($10.8 billion) on Friday.
Authorities are clearly watching closely, while attempting to project calm.
Last week, Fu Linghui, a spokesperson for China’s National Bureau of Statistics, acknowledged the difficulties of “some large real estate companies,” according to state media.
Without naming Evergrande directly, Fu said that China’s real estate market had remained stable this year but the impact of recent events “on the development of the whole industry needs to be observed.”
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