Evergrande’s debt sounds alarm for China’s economy

The debts afflicting China’s largest real estate giant, Evergrande Group, are a wake-up call for the country’s economy.

Emily Feng, writing in NPR, said buyers of around 1.4 million Evergrande units across China are unsure if the properties they paid for will ever be built.

Dozens of angry and worried investors have been picketing Evergrande’s headquarters in the southern city of Shenzhen for weeks. They had bought investment products from Evergrande that now look almost worthless as its Hong Kong-listed shares have fallen nearly 90% in value this year.

Evergrande is set to default on at least one tranche of bond interest payments totaling about $120 million, due at the end of September.

The embattled developer, China’s second-largest by sales volume last year, is saddled with debt it cannot repay. It owes a total of $368 billion in loans to banks, as well as debts to contractors and suppliers, Emily Feng said.

The financial woes run counter to the Chinese Communist Party’s two competing goals: to steer China’s private sector away from the speculative and risky lending practices that have driven indebtedness to dangerous levels, while avoiding a financial meltdown 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 fiscal reform aimed at reducing risk, deleveraging and moving away from [local government] land financing. Both of these goals are good,” says Bo Zhuang, chief China economist at Loomis Sayles, an investment firm. “But there is a risk of further spread to other developers, potentially causing a banking crisis or a debt crisis.

For nearly three decades, Evergrande – like dozens of Chinese developers – has been betting big on China’s booming infrastructure construction. He took out loans that often carried double-digit interest rates and bet his sales of apartments to be built would be high enough to pay off soaring debt, NPR reported.

Financial regulators have condoned these risky lending practices because of the way developers such as Evergrande have helped generate massive amounts of real estate wealth, as well as land sales revenue for local governments while transforming 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 drive up house prices. .

Policymakers have also signaled they will push local governments to reduce their financial reliance on land sales to generate revenue – a key driver of China’s property boom, Emily Feng said.

An economic downturn caused by the COVID-19 pandemic was already driving real estate purchases. Then, last summer, new government policies aimed at curbing speculative investment limited the number of homes people could buy. These rules took some buyers by surprise.

“We only learned of 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 Evergrande’s Taicang project when she already owned a second home in the city.

Purchasing it 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 caps on the ratio of debt a property developer can hold to its assets, equity and its cash.

Under this combination of new rules, Evergrande could not sell enough apartments quickly enough to pay off its debts at the rate set by regulators, Emily Feng said.

One question is whether pushing Evergrande to recover can actually destabilize the entire Chinese banking system. Buyers are so spooked by Evergrande that other developers are now seeing plummeting property sales and falling stock prices, which could lead to more property defaults in China.

Global equity markets were also rocked by the uncertainty. This month, the Dow Jones Industrial Average posted its worst performance since July, and the S&P 500 and the 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 are running out of time to contain the potential economic fallout.

Indeed, Evergrande does not only owe 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.


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