Chinese conglomerate Evergrande’s troubles have dominated the headlines in recent days after it warned once again that it could default on its astronomical debt due to a cash shortage.
Experts have characterized the company’s struggles as a major test for Beijing, which risks becoming China’s Lehman Brothers moment, setting off shockwaves in the world’s second-largest economy.
Here’s what you need to know about Chinese conglomerate 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 the Global 500, which means it is also one of the largest companies in the world by revenue.
It is listed in Hong Kong and is headquartered in the city of Shenzhen, in southern China, and employs about 200,000 people. It also indirectly helps maintain more than 3.8 million jobs each 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 country.
Evergrande made a name for itself in residential property, boasting that it “owns more than 1,300 projects in more than 280 cities” in China, but its interests extend far beyond that.
Outside of housing, the group has invested in electric vehicles, sports and theme parks. He even owns a food and beverage business, selling bottled water, groceries, dairy products, and other goods throughout China.
In 2010, the company bought a soccer team, which is now known as Guangzhou Evergrande. Since then, that team has built what is believed to be the largest soccer school in the world, at a cost of $ 185 million to Evergrande.
Guangzhou Evergrande continues to hit new records: it is currently working on the creation of the world’s largest soccer stadium, assuming construction is completed next year as expected. The $ 1.7 billion site is shaped like a giant lotus flower and will eventually be able to accommodate 100,000 viewers.
Evergrande also caters to tourists through its theme park division, Evergrande Fairyland. His claim to fame is a massive company 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 group’s most recent annual report, it began taking clients on a trial basis earlier this year, with plans for a full opening “by the end of 2021.”
How did you get in trouble?
In recent years, Evergrande’s debts soared as it borrowed to finance its various activities.
The group has gotten a bad rap for becoming China’s most indebted developer, with more than $ 300 billion in liabilities. For the past several weeks, he has warned investors of cash flow problems, saying he could default if he can’t raise money quickly.
That warning was underscored Tuesday, when Evergrande revealed in a stock exchange statement that it was having trouble finding buyers for some of its assets.
Somehow, the company’s aggressive ambitions are what got it into a bind, experts say. The group “got away from its core business a lot, which is part of how it got into this mess,” said Mattie Bekink, director of The Economist’s China Intelligence Unit.
Goldman Sachs analysts say the company’s structure has also made it “difficult to determine a more accurate picture of [its] recovery.” In a note this week, they noted “the complexity of the 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 deep [and] structural challenges of China’s economy related to debt,” Bekink said.
The problem is not entirely new. Last year, a large number of Chinese state-owned companies defaulted on their loans, raising fears about China’s reliance on debt-driven investments to support growth.
And in 2018, billionaire Wang Jianlin was forced to downsize his conglomerate, Dalian Wanda, when Beijing cracked down on firms applying for large loans to lobby abroad.
In a note Wednesday, Mark Williams, Capital Economics chief economist for Asia, said the Evergrande collapse “would be the biggest test that China’s 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. “Evergrande’s continued collapse has focused attention on the impact that a wave of defaults by property developers would have on China’s growth.”
How are you trying to move on?
On Tuesday, Evergrande announced that it had hired financial advisers to help assess the situation.
While those companies are tasked with exploring “all feasible solutions” as quickly as possible, Evergrande cautioned that nothing is guaranteed.
So far, the conglomerate has struggled to stop the bleeding and has been unable to find buyers for parts of its electric vehicle and real estate businesses.
As of Tuesday, it had made “no material progress” in its search for investors and “it is not clear whether the group will be able to complete such a sale,” he said.
The company has also been trying to sell its Hong Kong office tower, which it bought for about $ 1.6 billion in 2015. But that “has not been completed on schedule,” he said.
How are investors reacting?
Evergrande’s troubles took to the streets this week when protests reportedly broke out at its Shenzhen headquarters. Reuters footage showed dozens of protesters at the scene on Monday, addressing someone identified as a company representative.
But shareholders have been cautious for months: Shares have lost 80% of their value this year.
Last week, Fitch and Moody’s Investors Services downgraded Evergrande’s credit ratings, citing its liquidity problems. “We consider a default of some kind to be probable,” Fitch wrote in a note Tuesday.
The situation could scare investors in China generally, at a time when they are already reeling from Beijing’s crackdown on private sector companies, particularly in the tech sector.
“In our view, how Evergrande’s credit stresses will be resolved will boost market sentiment,” Goldman Sachs analysts wrote, referring to the credit market and the broader economy. They added that the Chinese bond market could be affected and a loss of confidence could “spread to the real estate sector in general.”
Wall Street appears to be more optimistic about the risks of contagion abroad.
“I don’t think the Evergrande collapse and the financial woes of Chinese real estate companies in general will have an impact on the US economy or markets,” Mark Zandi, chief economist at Moody’s Analytics, told CNN Business.
What could happen next?
Analysts expect the Chinese government to intervene to limit the consequences if Evergrande defaults. And the authorities are clearly watching closely, as they try to project calm.
On Wednesday, Fu Linghui, a spokesman for China’s National Bureau of Statistics, acknowledged the difficulties of “some large real estate companies,” according to state media.
Without naming Evergrande directly, Fu said that China’s real estate market has been stable this year, but it is necessary to look at the impact of recent events “on the development of the entire industry.”
Williams of Capital Economics predicts that the country’s central bank would “step in with liquidity support” if fears of a major default intensify.
The authorities are said to be taking action. On Tuesday, Bloomberg cited anonymous sources who said regulators had hired the international law firm King & Wood Mallesons, among other advisers, to examine the conglomerate’s finances. King & Wood Mallesons declined to comment.
According to the report, officials in Evergrande’s hometown Guangdong province have already rejected a ransom request from its founder. Guangdong and Evergrande authorities did not respond to a request for comment.
But some suggest that it may already be too late to save the company.
The Chinese media has widely described Evergrande’s financial problems as “a huge black hole”, implying that no amount of money can solve the problem.
“Ultimately, we expect the government to intervene in the Evergrande case as it will not allow the company’s defaults to spread to the banking system,” Bekink said.
“The impacts of a large Evergrande breach would be remarkable,” he warned.
From CNN.
