Evergrande debt crisis: 5 things to know about the Chinese business empire on the brink
Here’s what you need to know about Evergrande and how it got to where it is now.
Apart from housing, the group has invested in electric vehicles, sports and amusement parks. She even owns a food and beverage business, selling bottled water, groceries, dairy and other products across China.
How did he encounter problems?
In recent years, Evergrande’s debts have exploded as she borrowed to finance her various activities.
The group has gained notoriety for becoming the most indebted developer in China, with more than $ 300 billion in liabilities. In recent weeks, he has warned investors of cash flow issues, saying he could default if he is unable to raise funds quickly.
The warning was highlighted on Tuesday, when Evergrande revealed in a stock exchange document that it was struggling to find buyers for some of its assets.
In some ways, the company’s aggressive ambitions are what put it in the hot water, experts say. The group “has moved away from its core business, which is part of how it got into this mess,” said Mattie Bekink, Chinese director of the Economist Intelligence Unit.
Goldman Sachs analysts say the company’s structure has also made it “difficult to get a clearer picture of [its] recovery. ”In a note this week, they highlighted“ 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 depths [and] structural challenges of the Chinese economy related to debt, ”Bekink said.
In a note Wednesday, Mark Williams, Chief Economist at Capital Economics for Asia, said the Evergrande collapse “would be the biggest test the Chinese 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. “The ongoing collapse of Evergrande has drawn attention to the impact a wave of developer defaults would have on China’s growth.”
How does he try to move forward?
On Tuesday, Evergrande announced that it had called in financial advisers to help it assess the situation.
While these companies are tasked with exploring “all feasible solutions” as quickly as possible, Evergrande warned that nothing is guaranteed.
So far, the conglomerate has struggled to stem the bleeding and has failed to find buyers for parts of its electric vehicle and real estate services business.
As of Tuesday, he had made “no substantial progress” in his search for investors, and “it is not certain that the group will be able to make such a sale,” he said.
The company also attempted to sell its office tower in Hong Kong, which it bought for around $ 1.6 billion in 2015. But this was “not completed on schedule,” he said. he declares.
How are investors reacting?
Evergrande’s troubles spilled into the streets this week when protests reportedly erupted at its headquarters in Shenzhen. Reuters images showed dozens of protesters at the site on Monday, accosting a person identified as a representative of the company.
But shareholders have been suspicious for months: the stock has lost 80% of its value this year.
Last week, Fitch and Moody’s Investors Services both downgraded Evergrande’s credit ratings, citing its liquidity problems. “We consider that some default is likely,” Fitch wrote in a note Tuesday.
“In our opinion, how the Evergrande credit strains are resolved will influence market sentiment,” Goldman Sachs analysts wrote, referring to the credit market and the economy in general. They added that the Chinese bond market could be affected and that a loss of confidence could “spill over to the real estate sector at large”.
Wall Street seems more optimistic about the risks of contagion abroad.
What could happen next?
Analysts expect the Chinese government to step in to limit the fallout if Evergrande were to default. And the authorities are clearly watching closely, while trying to project calm.
On Wednesday, Fu Linghui, spokesperson for China’s National Bureau of Statistics, acknowledged the difficulties of “some large real estate companies,” according to state media.
Without directly naming Evergrande, Fu said that the Chinese real estate market has remained stable this year, but that the impact of recent events “on the development of the whole sector must be observed.”
Williams of Capital Economics predicted that the country’s central bank would “step in with liquidity support” if fears of a major default escalated.
According to the report, officials in Evergrande’s home province of Guangdong have already rejected a rescue request from its founder. Authorities in Guangdong and Evergrande did not respond to a request for comment.
But some suggest it may already be too late to save the business.
Evergrande’s financial woes have been widely described by Chinese media as a “huge black hole”, implying that no amount of money can solve the problem.
“We ultimately expect the government to intervene in Evergrande’s case because it will not allow the company’s defaults to spill over into the banking system,” Bekink said.
“The impacts of a major Evergrande default would be remarkable.”
–Kristie Lu Stout, Julia Horowitz, Laura He and the Beijing office of CNN contributed to this report.