Evergrande is one of the largest and most indebted real estate developers in China and the world. The company has been struggling to repay its debts, which exceed $300 billion, amid a regulatory crackdown on the property sector by the Chinese government. The crisis has raised concerns about the stability of China’s economy and the potential spillover effects on global markets.
Evergrande was founded in 1996 by Xu Jiayin, who became one of China’s richest men by expanding the company rapidly across hundreds of cities. Evergrande diversified into various sectors, such as electric vehicles, football, and bottled water, but its core business remained property development.
Evergrande’s troubles began in 2020, when the Chinese government imposed new rules to curb excessive borrowing and speculation in the property sector, known as the “three red lines”. Evergrande failed to meet these thresholds and was forced to deleverage by selling assets and cutting prices.
Evergrande’s liquidity crisis worsened in 2021, as it faced a series of debt deadlines and lawsuits from creditors, suppliers, and homebuyers. The company warned that it could default on its debts and that it faced “tremendous” pressure to raise cash. It also suspended trading of some of its bonds and sought to renegotiate terms with bondholders.
In September 2021, Evergrande missed interest payments on two offshore bonds, triggering a grace period of 30 days. The company also failed to pay interest on a domestic bond but reached an agreement with the bondholders to avoid default. The missed payments prompted ratings agencies Fitch and Moody’s to downgrade Evergrande’s credit rating and declare it in default.
In October 2021, Evergrande made a surprise payment of $83 million for an offshore bond that was due on September 23, staving off default for the time being. The company also resumed some of its construction projects that had been halted due to lack of funds. However, Evergrande still faced several other debt deadlines and uncertainties over its restructuring plan.
In November 2021, Evergrande proposed a restructuring plan that would involve swapping its debts for equity or new bonds. The plan would require approval from creditors, regulators, and courts. Evergrande said that the plan complied with international norms and best practices and that it aimed to protect the interests of all stakeholders.
In December 2021, Evergrande missed another interest payment on an offshore bond, triggering another grace period of 30 days. The company also reported a 29% drop in revenue for the first nine months of 2021 and said that it expected a significant decline in net profit for the full year. The company’s shares plunged to their lowest level since 2014.
The Evergrande debt crisis has raised fears of a systemic risk for China’s property sector, which accounts for about 30% of China’s GDP and supports millions of jobs. Some analysts have compared Evergrande to Lehman Brothers, the US investment bank whose collapse in 2008 triggered a global financial crisis. However, others have argued that China has enough tools and resources to contain the fallout and prevent a contagion.
The impact of the Evergrande debt crisis on global markets has been mixed so far. Some investors have sold off risky assets and sought safe havens, such as US Treasuries and gold, amid worries about China’s economic slowdown and financial stability. Others have seen opportunities to buy undervalued stocks or bonds in China or other emerging markets.
Evergrande’s default has significant implications for China’s economy and financial system, as well as for global markets. Evergrande accounts for about 4% of China’s GDP and employs about 200,000 people directly and indirectly. Its collapse could trigger a domino effect on other property developers, banks, shadow lenders, local governments, and other sectors that depend on real estate. It could also cause social instability and erode consumer confidence. Moreover, Evergrande’s default could spook foreign investors who hold about $20 billion of its offshore bonds, leading to capital outflows and contagion risks for emerging markets.
The Chinese government has adopted a cautious approach to deal with Evergrande’s crisis, balancing between maintaining financial stability and avoiding moral hazard. The government has not provided direct bailouts or guarantees to Evergrande or its creditors, but it has facilitated negotiations among different parties to reach orderly resolutions. The government has also instructed local authorities to ensure the delivery of unfinished homes to protect the interests of homebuyers. Furthermore, the government has tightened supervision and regulation of the property sector to prevent similar risks from arising in the future.
The government’s stance reflects its broader policy goals of deleveraging the economy, curbing speculation, and promoting social equality. The government views the property sector as a source of systemic risk and social discontent, as well as a drag on economic transformation. The government wants to reduce the reliance on real estate for growth and wealth creation, and instead foster innovation and consumption as new drivers of development. The government also wants to address the widening gap between rich and poor and ensure that housing is affordable and accessible for all.
Evergrande faces an uncertain future as it tries to restructure its debt and resume its operations amid legal challenges and regulatory pressures. It is unlikely that Evergrande will survive as a whole, but it may be able to salvage some of its core businesses or assets through asset sales or mergers. It may also be able to repay some of its creditors or investors through cash or equity swaps. However, the recovery rate for Evergrande’s stakeholders is expected to be low, given the complexity and scale of its liabilities.
China’s property market is also undergoing a structural adjustment as the government implements stricter rules and tighter credit conditions. The market is likely to see slower growth, lower prices, and higher defaults in the near term, as demand and supply adjust to the new reality. However, the market may also become more stable, sustainable, and balanced in the long term, as the government promotes affordable housing, rental housing, and rural revitalization.
The market may also see more consolidation, innovation, and diversification, as the government encourages healthy competition, green development, and mixed-ownership reform. The outcome of the Evergrande debt crisis will depend on how the company manages its restructuring process and how the Chinese government intervenes to maintain social stability and economic growth. The crisis could also have implications for China’s regulatory environment, property market, and financial system in the long term.
