Tuesday, September 14, 2021
Fear of mega bankruptcy
Evergrande makes China nervous
In China, fear of the real estate giant Evergrande going bankrupt is growing. First the corporate management assures that the company will not go bankrupt. But now she is warning of payment defaults. Not only are home buyers, craftsmen and small investors trembling – the Communist Party is also alarmed.
Six months after the down payment of the equivalent of 85,000 euros for her dream apartment, Ji Wenchen, like thousands of Chinese, is still waiting for the keys to be handed over. But the ailing real estate giant Evergrande is not keeping its promises. The 30-year-old had borrowed the sum from her parents. Your apartment is still under construction. “My name is not on the title deed, which means Evergrande hasn’t even paid my money to the city council. Normally, this should be done within a month,” she says. “I can hardly sleep and eat these days.”
Evergrande has accumulated nearly 300 billion euros in debt over years of aggressive expansion. The group is present in more than 280 Chinese cities and is one of the largest private companies in the People’s Republic. At the end of June, the stock of apartments under construction was 1.4 million, according to the consulting firm Capital Economics, and their value was the equivalent of 170 billion euros.
More and more customers fear that the pre-paid apartments will never be built. Suppliers and subcontractors have already complained about payment defaults; work on construction sites is suspended. The price on the Hong Kong Stock Exchange has fallen by around 75 percent since the beginning of the year.
The company admitted in a statement to the Hong Kong stock exchange that it was under “enormous pressure”. The company has hired financial advisors who should examine “all feasible solutions” in order to remove the mountain of debt. However, there is no guarantee that Evergrande will be able to meet all of its financial obligations, warned the company’s management.
She blamed the negative reporting for the current imbalance. The reports would have deterred potential buyers. September is the month when real estate sellers do the best business. Evergrande has already sold company shares and offered discounts on apartments. The company building in Hong Kong is also for sale.
“Attack on our rights”
The company was founded in 1996 by Xu Jiayin, who has since become the richest man in China. When it went public in 2009, Evergrande raised the equivalent of 7.6 billion euros. The decline began in August 2020 when the state imposed the so-called “three red lines” on real estate companies. These put limits on companies’ borrowing and forced them to reduce their liabilities. Evergrande had to sell real estate at increasingly higher discounts. Last week, two rating agencies downgraded their creditworthiness.
Evergrande is not only active in the real estate industry – in 2019 the group founded the electric car manufacturer Evergrande Auto, which has not yet sold a single vehicle. The company also invested in the tourism, internet, digital economy, insurance and amusement parks sectors. He also owns the Guangzhou FC soccer club in Canton.
Dozens of people were standing in the pouring rain in front of the company’s headquarters in Shenzhen in the south of the country today. They are home buyers, business partners and small investors. They all want the same thing: their money. “You owe me more than ten million yuan,” said a woman named Xia. She would have expected such a large corporation to pay the money – but the company didn’t. “This is an attack on our rights as citizens,” she says. “We managed projects for them, but we still haven’t received any money,” says another protester who refuses to give his name for fear of reprisals.
There are around 60 to 70 people who have gathered in front of the gate of the company that, like no other in China, stood for the dream of owning a home and prosperity. Company founder Xu Jiayin worked his way up from a poor rural dweller to one of the richest men in the country, symbolizing the rise of China since the economic opening in the 1990s.
Until recently, people were scrambling to invest their money in his company’s projects. Police officers are now blocking access to the headquarters with transparent shields and preventing journalists from filming.
Beijing wants to let air out of the bubble
In a country that is officially communist, owning property is an important sign of social status. In many families it is even a condition that a man owns an apartment before he can marry a woman.
The real estate sector is also an important part of the Chinese economy – it accounts for more than a quarter of all investments. Financed by cheap loans, tens of millions of households have invested in real estate. If a giant like Evergrande collapses, the economic consequences could be dire. Because if the so far steadily rising real estate prices fall below the amount of the loans to be repaid, China is threatened with a financial crisis.
This puts the Chinese leadership in Beijing in a predicament: on the one hand, they want to stop the growth of the real estate bubble financed on credit – on the other, there is a threat of social unrest if hundreds of thousands of citizens take to the streets in the event of a collapse of Evergrande and a resulting wave of bankruptcies be set. And nothing is more important to the Communist Party than social stability.
Bankruptcy would have a huge impact. “Evergrande’s collapse would be the biggest challenge facing the Chinese financial system in years,” said Mark Williams, chief Asian economist at Capital Economics. Then the central bank would have to step in and support Evergrande.
Williams called a restructuring of the group the “most likely scenario”. Other construction companies could take over the projects that have started. The pictures of angry people in front of the company headquarters could alarm the leadership in Beijing, which is trying to avoid social protests.
“I’m worried about my apartment, which the contract says I should be able to get by October 31,” said a man in Shenzhen who introduces himself as Kevin. The property is located in Jiaozuo, in the central province of Henan. “I asked Evergrande about this a few days ago. I was told there might be a delay because they didn’t have enough workers,” he says. “All I can do is wait.”
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