5 things to know about Evergrande, the Chinese business empire on the brink

The days and weeks to come will be critical. While Evergrande has a grace period of up to 30 days on an interest payment of nearly $ 84 million that was due Thursday, it is expected to make a payment on another bond next week.

Here’s what you need to know about Evergrande and how it got to where it is now.

What is Evergrande?

Evergrande is one of the largest real estate developers in China. The company is part of 500 worldwide – which means that it is also one of the largest companies in the world in terms of turnover.
Listed in Hong Kong and based in Shenzhen, southern China, it employs approximately 200,000 people. It also indirectly helps to maintain more than 3.8 million jobs every year.
The group was founded by Chinese billionaire Xu Jiayin, also known as Hui Ka Yan in Cantonese, who was once the richest man in the land.
Evergrande has made a name for itself in residential real estate – it is bragging that it “has more than 1,300 projects in more than 280 cities” across China – but its interests extend far beyond.

Apart from housing, the group has invested in electric vehicles, sports and amusement parks. She even owns a food and beverage business, selling bottled water, groceries, dairy and other products across China.

In 2010, the company purchased a football team, which is now known as Guangzhou Evergrande. This team has since built what is believed to be the largest football school in the world, at a cost of $ 185 million to Evergrande.
Guangzhou Evergrande continues to set new records: it is currently working on the creation of the largest football stadium in the world, assuming construction is completed next year as planned. The $ 1.7 billion site is shaped like a giant lotus flower and will eventually be able to accommodate 100,000 spectators.
Chinese club starts building world's largest soccer stadium for $ 1.7 billion
Evergrande also caters to tourists through its theme park division, Evergrande Fairyland. Its claim to fame is a gigantic enterprise called Ocean Flower Island in Hainan, the tropical province of China commonly known as “Chinese Hawaii”.
The project includes an artificial island with shopping centers, museums and amusement parks. According to the latest information from the group Annual Report, it started taking clients on a trial basis earlier this year, with plans for full opening “by the end of 2021”.

How did he encounter problems?

In recent years, Evergrande’s debts have exploded as she borrowed to finance her various activities.

The group has gained notoriety for becoming the most indebted developer in China, with more than $ 300 billion in liabilities. In recent weeks, he has warned investors of cash flow issues, saying he could default if he is unable to raise funds quickly.

This warning was underline this month, when Evergrande revealed in a stock market file that it was having trouble finding buyers for some of its assets.
Chinese real estate giant Evergrande again warns it could default on huge debts

In some ways, the company’s aggressive ambitions are what put it in the hot water, experts say. The group “has moved away from its core business, which is part of how it got into this mess,” said Mattie Bekink, Chinese director of the Economist Intelligence Unit.

Goldman Sachs analysts say the company’s structure has also made it “difficult to get a clearer picture of [its] recovery. “In a recent note, they underlined “the complexity of Evergrande Group, and the lack of sufficient information on the assets and liabilities of the company”.

But the group’s struggles are also emblematic of the underlying risks in China.

“The story of Evergrande is the story of the depths [and] structural challenges of the Chinese economy related to debt, ”Bekink said.

The problem is not entirely new. Over the past year, a large number of Chinese state-owned enterprises defaulted on their loans, raising fears that China may depend on debt-fueled investments to support growth.
And in 2018, billionaire Wang Jianlin was forced to reduce size its conglomerate, Dalian Wanda, as Beijing cracked down on companies that borrowed heavily to grow abroad.
A woman riding a scooter in front of the construction site of an Evergrande housing complex in Zhumadian, Henan province, September 14, 2021.

In a recent note, Mark Williams, Capital Economics’ chief economist for Asia, said the Evergrande collapse “would be the biggest test the Chinese financial system has faced in years.”

“The root of Evergrande’s problems – and those of other highly leveraged developers – is that demand for residential properties in China is entering an era of sustained decline,” he wrote. “The ongoing collapse of Evergrande has drawn attention to the impact a wave of developer defaults would have on China’s growth.”

How does he try to move forward?

Evergrande noted On Wednesday, in a document filed with the Shenzhen Stock Exchange, problems over the payment of a national bond in yuan were “settled through negotiations.” The amount of interest he owed on the bond is around 232 million yuan ($ 36 million), according to data from Refinitiv.

While the news may appease investors, many questions remain unanswered. Evergrande did not specify the terms of the payment in its statement, and interest worth $ 83.5 million on a dollar-denominated bond also matured on Thursday. This deadline came and went with no update from the company.

On September 14, Evergrande announced that it had brought in financial advisers to help assess the situation.

While these companies are tasked with exploring “all feasible solutions” as quickly as possible, Evergrande warned 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 real estate services business.

China Evergrande Center in the Wan Chai district of Hong Kong.

At the time of this filing, he had made “no significant progress” in his search for investors, and “it is not certain that the group is able to make such a sale”, he said. .

The company also attempted to sell its office tower in Hong Kong, which it bought for around $ 1.6 billion in 2015. But this was “not completed on schedule,” he said. he declares.

How are investors reacting?

Evergrande’s problems have spilled over into the streets this month when protests erupted at its headquarters in Shenzhen. Reuters images showed dozens of protesters at the site last week, approach a person identified as a representative of the company.

But shareholders have been suspicious for months: the stock has lost nearly 85% of its value this year.

Earlier this month, Fitch and Moody’s Investors Services both downgraded Evergrande’s credit ratings, citing its liquidity problems. “We regard some fault as probable,” Fitch wrote in a recent note.

The situation It also appears to be scaring investors in China more broadly, at a time when they are already reeling from Beijing’s crackdown on private sector companies, especially in the tech sector. Stocks in Hong Kong, New York and other major markets were influenced by fears of contagion from Evergrande and slowing Chinese growth.

“In our opinion, how the Evergrande credit strains are resolved will influence market sentiment,” Goldman Sachs analysts wrote recently, referring to the credit market and the economy in general. They added that the Chinese bond market could be affected and that a loss of confidence could “spill over to the real estate sector at large”.

What could happen next?

The Chinese government seems to be starting to intervene.

Over the past few days, the People’s Bank of China has injected liquidity into the financial system, to help increase short-term liquidity and calm nerves.

According to Bloomberg, the net injection for banks was 460 billion yuan ($ 71 billion) this week, of which 70 billion yuan ($ 10.8 billion) on Friday.

The authorities are clearly watching closely, while trying to project calm.

Last week, Fu Linghui, spokesman for China’s National Bureau of Statistics, acknowledged the difficulties of “some large real estate companies,” according to state media.

Without directly naming Evergrande, Fu said that the Chinese real estate market has remained stable this year, but that the impact of recent events “on the development of the whole sector must be observed.”

People gathered at Evergrande's headquarters in Shenzhen on Wednesday.
Last week, Bloomberg too cited anonymous sources as saying that regulators had hired international law firm King & Wood Mallesons, among other advisers, to review the conglomerate’s finances. King & Wood Mallesons declined to comment.

According to the report, officials in Evergrande’s home province of Guangdong have already rejected a rescue request from its founder. Authorities in Guangdong and Evergrande did not respond to a request for comment.

Beijing has few good choices. He will want to protect the thousands of Chinese who bought unfinished apartments, as well as construction workers, suppliers and small investors.

The authorities will also likely aim to limit the risk of bankruptcy of other real estate companies. But at the same time, they’ve long been trying to curb excessive developer borrowing – and won’t want to dilute that message.

An aerial view of the Guangzhou Evergrande football stadium under construction in December 2020.

Even with cash injections, some suggest it may already be too late to save the business.

Evergrande’s financial woes have been widely described by Chinese media as a “huge black hole”, implying that no amount of money can solve the problem.

“China has been really trying to clean up bad debts for years. And although they made progress before the pandemic, the task often seems endless, and that’s certainly what you see here,” Bekink said.

“The impacts of a major Evergrande default would be remarkable.”

–Kristie Lu Stout, Julia Horowitz, Laura He and the Beijing office of CNN contributed to this report.

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