China’s second-largest real estate developer by sales, Evergrande, admitted this week it is under “tremendous pressure” and may not be able to meet its crippling debt obligations.
The company’s share price has plunged nearly 80% so far this year, with trading of its bonds repeatedly halted by Chinese stock exchanges in recent weeks
The firm has been downgraded by rating agencies Fitch and Moody’s.“We view a default of some kind as probable,” said Fitch.
Meanwhile, some 1.5 million people have put deposits on new homes that have yet to be built.
On Tuesday, Evergrande said in a statement to the Hong Kong Stock Exchange that it had hired financial advisers to explore “all feasible solutions” to ease its cash crunch. The statement warned that there was no guarantee the company would meet its financial obligations. On Monday, the Shanghai Stock Exchange paused trading in Evergrande’s May 2023 bond after it dropped more than 30%.
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The property firm, which was started in 1997 and reportedly employs 200,000 people, has grown vastly due to a real estate boom in China. Evergrande sells apartments to upper- and middle-income property buyers, and has a presence in more than 280 cities, completing nearly 1,300 commercial, residential, and infrastructure projects. The company has expanded into other areas of the economy, including the food and beverage business, life insurance, TV, and leisure. It also bought the Guangzhou FC football club, formerly Guangzhou Evergrande.
However, after years of borrowing to fund rapid growth and various pursuits in recent years, Evergrande’s debts have ballooned to more than $300 billion.
Analysts warn that the conglomerate’s potential bankruptcy could not only hurt China’s financial system – real estate is responsible for 29% of the country’s economic output – but even spread to markets outside of China. Some experts say that Beijing is likely to step in.
“Evergrande is such an important real estate developer, and it would be a strong signal if anything happened to it,” Dan Wang, an economist at Hang Seng Bank, told CNBC. “I believe there will be some supporting measures from the central government, or even the central bank, trying to bail out Evergrande.”
Others point out that restructuring could be more likely, and that the government will prioritize homebuyers and banks over other parties.
“The most likely endgame is now a managed restructuring in which other developers take over Evergrande’s uncompleted projects in exchange for a share of its land bank,” said Mark Williams, chief Asia economist at Capital Economics.
Bloomberg reported on Tuesday, citing its sources, that regulators had enlisted international law firm King & Wood Mallesons, among other advisers, to examine Evergrande’s finances.
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