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For Evergrande, the company reportedly owes billions of dollars to around 171 domestic banks and 121 other financial firms across the world. And on Monday, the developer defaulted on overdue interest on two dollar bonds.
What’s been happening with Evergrande?
- It’s been all over the news, but China’s Evergrande Real Estate Group, formerly the largest property developer in China, has been facing intense scrutiny.
- Based on current estimates, the company is the most indebted property developer in the world with over US$300 billion in bad debt, which is debt it probably can’t pay anytime soon.
- The reason it accumulated so much debt was because they would use a bit of money to acquire land and they use a down payment from the buyers and then borrow money from the bank to acquire more land. But then, demand for properties slowed while they continued to be developed. And now, China reportedly has around 20% of unoccupied housing.
- 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 to try and generate cash to pay off their obligations as soon as possible, their sales still fell 26% in August from last year.
- Up to now, Evergrande was able to avoid defaulting on some of its debt at the last minute on three separate occasions.
- But last week, Evergrande couldn’t make one of these payments, meaning that the company has officially defaulted on some of its debt for the first ime.
What does that mean?
- Simply put, when people say “default” when talking about debt, they mean that a company or individual couldn’t pay.
- Specifically for Evergrande, the company reportedly owes billions of dollars to around 171 domestic banks and 121 other financial firms across the world. And last week, the developer failed to pay overdue interest on two dollar bonds.
- With that, Fitch Ratings, an international credit rating agency that investors use as a guide to which investments will not default, officially stated that Evergrande has entered “restricted default."
- And, according to Alicia Garcia-Herrero, Natixis’ chief economist for Asia-Pacific, partially why some people weren’t ready to admit the truth that Evergrande had actually defaulted for quite some time before this past week was because of the potentially widespread economic consequences.
- “We should have been calling this a technical default for a long time already, but nobody dared. China is not making it clear because there’s no pressure to make it clear,” she said. “Ratings [agencies] should be pushing. Some investors did push. Nobody wants to label this because they don’t want to bear the consequences. Everybody’s trying to increase what they can get out of it.”
- Renowned Harvard Professor Kenneth Rogoff and International Monetary Fund (IMF) Economist Yuanchen Yang published a research paper back in August 2020, which estimated that the real estate sector accounts for around 29% of China’s gross domestic product (GDP).
- According to some experts, with the real estate sector accounting for such a large portion of the country’s total GDP, failure on Evergrande’s part could have a huge impact for the entire country.
- Dr. Tenpao Lee, a professor of economics at Niagara University in New York, explained to TMS that because the real estate industry is so intertwined with other sectors of the economy, the performance of Evergrande has a chain reaction.
- “Nowadays, all the sectors are interrelated, so real estate is interrelated to other industries as well. In this case, the banking industry because there are over 200 banks that are involved [with Evergrande]. So if the real estate sector is falling apart, then the Chinese economy, the whole country, may [be set back] five years. This is because China took 40 years to grow, become the second-largest economy of the world. So, the chain reaction to this is enormous.”
- Evergrande also isn’t the only real estate developer who has defaulted or is risking default.
- Kaisa Group Holdings is another real estate developer in China, and it also defaulted on its debt payments the same day as Evergrande. Modern Land China Co Ltd., Sinic Holdings Group Co Ltd. and Fantasia Holdings are also some of the other developers that have defaulted or are on the brink of defaulting on their payments.
What did Chinese officials say?
- Initially, the Chinese government stayed quiet while many speculated how they would handle the situation.
- Mind you, Evergrande’s default came after the Chinese government bailed out China Huarong Asset Management Co., which many thought would act as a precedent on how the Chinese government would treat these struggling yet large businesses.
- But then, Chinese officials stepped in and called a meeting with all the largest Chinese property developers, telling them to do everything in their power to avoid default, even if it meant selling the founder’s personal assets to generate needed cash. And that’s what Evergrande founder Xu Jiayin did. But based on this default, it clearly wasn’t enough.
- The People’s Bank of China (PBOC) has repeatedly criticized Evergrande and its management for the situation. “Evergrande’s risks are mainly due to its own poor management and blind expansion,” the PBOC said in early December.
- On top of that, officials have repeatedly said that Evergrande’s situation is isolated, with a spokesperson for the China Banking and Insurance Regulatory Commission saying in a statement that Evergrande’s inability to fulfill its offshore debt obligations “is an individual case in a market economy.”
- And, after Evergrande defaulted on its loan payments on Monday, a video of People’s Bank of China Governor Yi Gang aired on Thursday with him saying that Evergrande’s inability to pay will be dealt with in a market-oriented way, reminding people that the government won’t be bailing the company out.
- Despite concerns that an Evergrande default would lead to financial contagion, the company’s first default didn’t signal doing this.
- This is because investors have been preparing for this possibility for months. On top of that, while the Chinese government isn’t bailing out the company, they have recently made moves to support Evergrande, the industry and the economy as a whole.
- This includes making it easier for companies to borrow money from banks and appointing officials from the developer’s province to help with the company’s restructuring.
- For the last few months, for example, local governments have been trying to restart some of the construction projects that were suspended after the developer couldn’t pay its suppliers. This way, the suppliers get paid and homeowners get the homes they were promised.
- On top of that, Xu has been selling his company stock and personal assets, scrambling for cash to get Evergrande out of its current situation. For example, on Monday, he sold around 278 million, worth roughly HK$492 million (US$63.08 million), with his shareholding now at 59.78% from 61.88%.
- Some have also said that defaulting on this loan may lead to a cross-default on the other loan repayments that the company has coming up. But, for now, we need to wait and see because, with the company now working on debt restructuring, such as extending deadlines, this will work to ease some of its upcoming obligations.