The investment world has its eyes on Evergrande, one of the biggest real estate developers in China, as its recent failure to pay bond interest could send ripple effects across the globe.
Already protests have broken out in and near Evergrandes headquarters and other offices, with disgruntled home buyers, investors, and suppliers demanding payments. The companys stock has plummeted this year, and the damage to the Chinese bond market may lead to similar declines in the global property sector and overall market.
TL;DR
- Evergrande, a major real estate development company in China, is in crisis with more than $300 billion in debt.
- Evergrande missed two major bond interest payments within a week in September, causing serious concern by investors and market analysts.
- Possible outcomes of this issue include a government bailout, a restructuring of the corporation, and a default.
- The Chinese authorities may intervene in some way, but wont want to encourage excessive borrowing by making things too easy on Evergrande.
- The Evergrande situation has already begun to impact global markets, and a default could have more drastic consequences.
What does Evergrande do?
Evergrande is one of the largest real estate developers in China. Real estate represents about 30% of the nations GDP. It also has a spot on the Global 500, so its one of the largest 500 companies in the world by revenue.
Founded by the former wealthiest man in the country (still a multi-billionaire), Xu Jiayin, Evergrande is involved in 1,300+ housing projects along with other businesses. It owns a soccer club, Guangzhou Evergrande, for which the company is building a 100,000-person capacity stadium at a $1.7 billion price tag.
Other industries Evergrande is involved in include food and beverages, electric vehicles, and a theme park division. In recent days the company has attempted to sell off its electric vehicle division as well as some property services businesses.
How Evergrande got into so much debt
Evergrande isnt the only Chinese company to take on gargantuan sums of debt. A group of Chinese state-owned companies defaulted on loans last year.
Evergrande has operated largely on debt for years, much like the entire Chinese real estate industry. The CEO Mr. Xu would even borrow twice on each plot of land, once from the bank and again from eager homebuyers. The company had 700+ projects under construction at the end of 2020, covering 132 million square meters in floor area (equivalent to 513 Empire State Buildings).
The company has been pre-selling property units before completion. Housing costs compared to income are drastically more expensive in China than even pricey urban locations like Paris and San Francisco.
Evergrandes liabilities include $20 billion in US dollar-denominated bonds, $67.6 billion in Chinese yuan debt, $147.2 billion owed to contractors and other third parties, and $68.7 billion in taxes and other liabilities.
Evergrande has made attempts to limit its losses, having announced the sale of its stake in a local bank for about $1.5 billion. It also reportedly settled one of its domestic yuan bonds through negotiations, terms undisclosed. Selling its office tower in Shanghai has been another shot at partial salvation.
The company has hired financial advisors to assist in developing a strategy for emerging from this crisis, with the hopes of averting a default. The two recent missed bond payments dont automatically trigger a default as the firm has a 30-day grace period.
Will Evergrande collapse or get bailed out?
Evergrande is a major conglomerate in a major economy, so it’s unsurprising that its debt woes have brought up the question of a potential government bailout.
The $300+ billion in liabilities that Evergrande is under is reminiscent of the Lehman Brothers debacle. In 2008, the fourth-largest U.S. investment services firm, Lehman Brothers, seemed an unlikely candidate for such a disastrous end. The firm went bankrupt at the height of the subprime mortgage crisis when other institutions got bailed out.
Chinas state-sponsored Global Times newspaper editor stated in a recent commentary that people should not expect the Chinese government to bail out Evergrande based on the idea of it being “too big to fail.” A restructuring appears likely, according to some investors like Michel Lwy, CEO of a firm that invests in Evergrande called SC Lowy.
Chinese authorities are working to create solutions for the embattled property developer. The Peoples Bank of China injected $15.5 billion into its financial system to improve liquidity. The central banks goal is to keep the real estate market healthy and protect the interests of housing consumers.
How the Evergrande crisis affects the global market
The impacts from a large default by Evergrande would be remarkable, Mattie Bekink, China director of the Economist Intelligence Unit, told reporters. Trading for Evergrande stock halted on Monday, October 4 on the Hong Kong exchange, pending a “major transaction.”
Worldwide, stocks have already felt the impact of Evergrandes shaky foundation. In mid-September 2021, the Dow Jones Industrial Average, S&P 500, Nasdaq Composite, and the MSCI global stock index all dropped in response to the crisis.
The scope of Evergrandes troubles is massive enough to extend to the global market. Goldman Sachs analysts believe the resolution of Evergrandes debt will be a large driver of market sentiment.
Why Evergrande matters for US investors
U.S.-based investors are paying attention to Evergrandes troubles, largely because of one fact: In times of crisis, its likely the Chinese company will focus on salvaging initial investments for its own investors, not those overseas.
The fact that the recently missed bond payments were on dollar-denominated bonds also seems to suggest China will prioritize payments to its own investors, rather than foreign investors such as those in the States.
Bottom line
Exactly how the Evergrande crisis will play out is still up in the air, but its fairly clear that a significant number of international stakeholdersnot just those in the real estate property sectorwill face adverse effects as the Evergrande crisis continues.