Buyers of homes built by the real estate company hope that the Chinese government will come to their rescue if the company ends up going bankrupt.
Taken from El País
Zhao Lijun (not his real name) had managed to save some money last year from his job in the machinery industry. Like the vast majority of Chinese citizens with some disposable income, he knew exactly what he wanted to do with it: buy an apartment . Like many of his compatriots, Zhao was convinced that his was a safe investment. That real estate prices would never fall, despite what doomsayers might say from time to time. He did some research on available apartments in his city, Ningbo (one of China's major ports), and found one off-plan that seemed perfect. The construction company, he thought, was a sure thing. The second largest in the country: Evergrande .
“I chose it because it’s in a good area, the surroundings are very nice, and the price was very good,” Zhao says about his apartment. He paid 600,000 yuan (79,000 euros) for a two-bedroom, 83-square-meter model. He already owned another apartment, but his parents live there. “I bought this one to live in myself, but it also seemed like an excellent investment.” The delivery date was 2023. Everything was going well, but this year construction stopped. “The apartment is almost finished. The main structures were already completed; all that’s left is to finish the interior and add the decorative elements,” he laments.
Now Zhao, like hundreds of thousands of other buyers, doesn't know when he'll finally receive the keys to his home. The delivery dates for nearly 1.5 million homes built by Evergrande across China have been thrown into disarray. The giant had feet of clay : during the past decade, like many other Chinese conglomerates that grew at lightning speed, it resorted to debt to finance an expansion as ambitious as it was chaotic. Evergrande ventured into insurance, healthcare, theme parks, drinking water, soccer, electric vehicles, and wealth management products.
NG HAN GUAN / AP.
Today, it is the most indebted real estate company in the world, with obligations of $305 billion (around €260 billion, almost a quarter of Spain's 2020 GDP). Its liquidity crisis, which has forced it to halt so many projects and prevents it from repaying numerous contractors, investors, and buyers, has global markets on edge and is keeping Chinese authorities on high alert, although they are currently maintaining public silence. The bankruptcy, which is now widely considered a foregone conclusion , could spread throughout the sector and threatens to have significant repercussions on the already weakened growth of the world's second-largest economy (and, therefore, could also impact the global economy). It could also generate problems of social stability, the great anathema to Beijing.
For weeks, as uncertainty about the company's future worsened, protests have been taking place outside Evergrande's headquarters in Shenzhen, with buyers and contractors demanding their money back. Many had invested in the group's wealth management products, which have lost more than 84% of their market value so far this year. The nervousness, which triggered panic in global markets on Monday , has surged again after a few days of calm starting this Friday, when it became clear that Evergrande had been unable to make an $84 million interest payment on a foreign bond.
All eyes are now on how the Chinese government will manage the situation . Regulators face a dual objective. On the one hand, “to teach a lesson: that taking on so much debt and making bad business decisions has a cost,” notes Julian Evans-Pritchard of the consultancy Capital Economics. “I think they have already sent clear signals that there will be no bailout for the company or those who lent it money,” he adds. On the other hand, they must prevent a potential collapse of the real estate sector, something that would be a complete calamity for the world’s second-largest economy. This industry represents more than a fifth of China’s GDP and accounts for more than 70% of the Asian giant’s urban wealth.
Over the past three decades, and especially the last, the company founded in 1996 by Xu Jiayin built a “reputation for highly creative financial engineering,” recalls Dinny McMahon of the consultancy Trivium. Even within a sector as addicted to credit as el inmobiliario in China, where debts total around five trillion yuan, Evergrande outperformed the rest. But this was tolerated: real estate generated wealth, fueled the economy, and filled local government coffers through tax revenue from land sales. Moreover, the company remained solvent, thanks to obtaining more loans and selling wealth management products that promised investors generous returns, up to 9%.
The trigger for the crisis came last August, from a political decision. Concerned about yet another surge in housing prices—the umpteenth in a country where real estate is the preferred investment for families—the Chinese government began to take action to reduce debt levels in that sector and imposed the so-called “three red lines” regarding the ratio of debt to companies' cash, assets, and profits. Evergrande violated all of them.
As a result, the giant's access to new credit dried up. It could only rely on its revenue to cover its obligations. And a snowball effect began, growing larger and larger over the months despite the group's attempts to divest investments or sell properties at bargain prices to raise cash. By this summer, it was already clear that it was having trouble paying some suppliers.
“People are going to see the play”
“We started hearing about problems in June. And there were more and more reports about it,” says Ms. Li, a 39-year-old self-employed businesswoman who last year bought a 114-square-meter apartment off-plan in an Evergrande development in Zhenjiang, a city on the banks of the Yangtze River in eastern China. “The development I bought in was the best-selling in our city last year. But now new things about Evergrande are coming out every day. People are going to the construction site to check on the progress of the apartments. The final phase of the development is at a standstill. Ours isn’t completely stopped, but it’s progressing much more slowly than before, and I hope it doesn’t stop too. We were supposed to get our apartments by the end of this year, but I don’t know if they’ll manage it,” she laments.
Although Evergrande's future is uncertain , all analysts agree that the unbuilt apartments will eventually be completed, either by this developer or by rival companies that acquire its projects. "Ultimately, the authorities will intervene to prevent a systemic crisis and to ensure that families receive the homes they were promised," says Evans-Pritchard.
Otherwise, the country risks social unrest. Evergrande's real estate projects "are not only a source of economic growth, but completing them is a key factor in maintaining social stability in China," McMahon points out. The priority, therefore, will be to ensure that in the event of an Evergrande debacle, small investors and homebuyers are the most protected, and that real estate prices do not collapse due to public distrust in purchasing properties.
The central government has already instructed local governments to be ready to deal with the “potential storms” resulting from the group’s collapse, The Wall Street Journal . These authorities will have to create expert groups to analyze the real estate company’s accounts in their respective territories, negotiate with local developers to take over Evergrande’s projects, and establish law enforcement teams to monitor “mass incidents” (protests) and public unrest, the newspaper reported.
Zhao is confident that the authorities will somehow resolve the problem with his apartment. “There’s time. My apartment isn’t due until 2023, and in any case, the local government has experience in restructuring companies. I’m sure that even if Evergrande goes under, my development can be sold to someone else and completed.”.
