China’s fragile housing giant, Real Estate News, ET RealEstate
BEIJING: Chinese housing giant Evergrande is one of the country’s largest and most indebted private conglomerates, on the brink of bankruptcy after years of rapid growth and buying frenzy.
Paralyzed by debt, the company’s Hong Kong-listed shares slumped this year amid growing fears for its financial health.
A possible bankruptcy of the group – which claims to employ 200,000 people and indirectly generate 3.8 million jobs in China – would have major repercussions on the economy of the country, and perhaps the world.
Here’s what we know about Evergrande:
What is Evergrande? With a presence in more than 280 cities, Evergrande is one of the largest private companies in China and one of its main real estate developers.
The company made its fortune through decades of rapid real estate development and wealth accumulation as China’s reforms opened up the economy.
Its chairman, Xu Jiayin, was ranked as the fifth richest person in the country in a recent Hurun Wealth Report.
What does it do? Although mainly a real estate company, the group has engaged in recent years in an all-out diversification.
Apart from real estate development, he is now best known in China for his football club Guangzhou FC, formerly Guangzhou Evergrande.
The group is also present in the flourishing mineral and food water market, with its Evergrande Spring brand. He also built amusement parks for children, which he boasted of being “bigger” than those of his rival Disney.
Evergrande has also invested in tourism, digital operations, insurance and healthcare.
Some investments have been more successful than others. It is the electric car Evergrande Auto, founded in 2019, does not currently sell any vehicle.
What are the problems? In short: the debt.
Evergrande has increased acquisitions in recent years, taking advantage of the real estate frenzy.
The group said this week that its total liabilities had swelled to 1.97 trillion yuan ($ 305 billion) and warned of “the risks of default on loans.”
In August, rating agency Moody’s, concerned about repayment capacity, downgraded its strength rating to “negative”, while Fitch and Standard & Poor’s have since followed suit.
Evergrande shares have lost over 70% of their value in a year, and some contractors and suppliers have complained about not being paid on time.
Bloomberg News reported on Friday that some creditors of the heavily indebted giant are demanding immediate repayment of the loans.
Last year, a leaked letter from Xu apparently asking regulators for permission to restructure, caused market panic – although Evergrande later said it was a fake.
However, the ensuing unrest led the group and its investors to agree to repay some 130 billion yuan in debt.
The Shenzhen-based group has been called a “gray rhino” by Beijing – a large company with alarming debt that poses systemic financial risk.
In recent years, authorities have pushed similar companies to cut spending, including real estate giant Wanda and tourism conglomerate Fosun.
After that ? Real estate is one of the engines of the Chinese economy and the sector has played a key role in the post-pandemic recovery.
Any bankruptcy would have major repercussions on the world’s second-largest economy.
The debt-laden developer announced a decline in first-half profits in late August, with net profit falling 29% from a year earlier to 10.5 billion yuan, following a warning on previous profits.
Business leaders will now have to try to reduce its debt while maintaining its profitability, while Beijing tightens the conditions of access to credit for real estate developers.
It was the subject of an asset sale, including the offloading of stakes in stakes such as a Hong Kong listed internet company, a regional bank and an onshore real estate company. Meanwhile, Bloomberg News and local media have reported that they are considering at a loss the sale of its Hong Kong headquarters and a large piece of land in the city.
Meanwhile, under new rules, Evergrande can no longer sell any property until it officially completes construction, ending a presale practice that the group has used extensively to fund themselves and maintain their businesses. activities afloat.
However, analysts believe that regardless of the group’s problems, there is a slim chance that Beijing will allow such a monster to go to the wall – instead of pushing it to reduce its debt and pushing for it. he reduces his exposure.
Beijing “will not let Evergrande go bankrupt,” say analysts at the US company SinoInsider, believing that this would “have a huge impact on the regime” and its stability.