What’s new with Evergrande as it continues teetering on the edge of default?

Not only did Evergrande offer these high returns, but apparently, they also offered Gucci bags and Dyson products to individual investors who invested in over three million yuan worth of WMPs during a Christmas promotion last year.

• Since China Huarong Asset Management Co., Ltd., or just Huarong, was bailed out of its financial crisis earlier this summer, many have wondered if the Chinese government would take a similar approach to Evergrande Real Estate Group.

• If Xu Jiayin, the founder and previous chief executive officer of Evergrande, was wondering if China would bail them out of this debt debacle, it seems like the country has somewhat answered.

• According to Bloomberg, sources familiar with the matter said that Chinese authorities told Xu to use his wealth to help pay off the company’s debt that it had grown during its rapid expansion.

What’s new with Evergrande?

• Evergrande, at one point, was the largest property developer in China.

• While the company’s size wasn’t the problem, it was the fact that when Evergrande was growing, they weren’t using their own money. “For example, they used a little bit of money to acquire land … and they use a down payment from the buyers and then borrow money from the bank and then acquire more land,” explained Dr. Tenpao Lee, a professor of economics at Niagara University in New York to TMS.

• During this time, Evergrande also started investing in everything from football teams to building a man-made island, and it did all this by borrowing debt rather than paying for it directly.

• On top of this, the real estate market in the country started being too overdeveloped, meaning there was an oversupply of housing and falling demand. Now, approximately 20% of the nation’s housing is unoccupied.

• Based on current estimates, the company is the most indebted property developer in the world, with over US$300 billion in bad debt.

• In fact, the company has about US$7.4 billion of repayments coming due next year, and even though it has been offering steep discounts on its properties and other assets it owns to try and generate cash as soon as possible, their sales still fell 26% in August from last year.

How did it get this bad?

• This situation is now referred to as the Evergrande liquidity crisis, with the company’s position having massive implications on the global economy.

• A big factor contributing to the Evergrande liquidity crisis was the sale of wealth management products (WMP).

• Last year, the Chinese government capped the amount of debt that property developers could take on, meaning that Evergrande, who was reliant on debt to operate their business, needed to look for new funding methods to generate cash.

• So the company turned to individual investors as well, such as employees and clients, offering them these WMPs “to plug funding gaps."

Wait, what are WMPs?

• WMPs have risen in popularity over the last 10 years and are short-term, high-risk and underregulated investments usually kept off the balance sheet. And, to try and lure investors, these investments typically offer returns of up to 12%.

• Because the Chinese Central Bank has also been cutting interest rates, the appeal of these high-return investments versus bank deposits grew.

• Not only did Evergrande offer these high returns, but apparently, they also offered Gucci bags and Dyson products to individual investors who invested in over three million yuan worth of WMPs during a Christmas promotion last year.

• Speaking to Al-Jazeera, an individual investor surnamed Du, who had put 650,000 yuan (US$100,533) into Evergrande’s WMPs at an interest rate of over seven percent, said, “It’s immoral of Evergrande not to pay my hard-earned money back.” Du added, “I trusted Evergrande for being a Fortune Global 500 company.”

What’s the problem?

• The problem is that Evergrande was selling these to retail investors’ money to pay back other liabilities and debt that the company had taken on. Meanwhile, as mentioned earlier, the real estate market in the country is becoming overdeveloped, so the company had less money coming in.

• According to the Financial Times, and Evergrande executive is quoted to have said that “many people … might be arrested for financial fraud if investors don’t get paid off. Our products were not for everyone. But our grassroots salespeople didn’t consider this when making their sales pitches and they targeted everyone in order to meet their own sales targets.”

• “Some WMP proceeds were used to repay previous products but sales plummeted, making it difficult for the business model to continue,” he admitted.

What has been China’s response?

• On October 15, the Chinese government commented for the first time on the Evergrande situation, when Zou Lan, director of the People’s Bank of China’s (PBOC) financial markets department, blamed the company for its problems and said that further harm to the financial system was controllable.

• “China Evergrande Group’s problems in the real estate industry are an individual phenomenon,” he said. “Most real estate businesses are operating stably and have good financial indicators, and the real estate industry overall is healthy.”

• Days after Lan’s comments, Sinic Holdings, another major property developer, defaulted on US$246 million worth of bonds. And, just a few weeks before that, on October 5, 2021, another property developer called Fantasia Holdings defaulted on US$206 million worth of bonds.

• China is one of the only global economies that doesn’t really have a real estate tax, which many say has contributed to the overdevelopment of the real estate market.

• This is something that the Chinese government has also acknowledged in the past, with Chinese President Xi Jinping saying, “Houses are for living in, not for speculation,” back in 2017.

• “We should actively and steadily promote the legislation and reform of real estate tax, and do a good job in the pilot work,” Xi wrote in Qiushi, the government’s top policy journal, earlier this month.

What’s next?

• So far, the developer has missed bond payments amounting to US$280 million and has about another US$338 million in other offshore interest payments coming due this year.

• The company has gone as far as to try to sell its headquarters in Hong Kong and. It has also limited itself in responding to investors.

• Whether or not the company survives, this financial crisis is one thing, but whether their reputation can is a whole other.

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