CM – How Beijing’s fight against debt shook the foundations of a real estate giant


In a risky race against time that lasted two decades, the China Evergrande Group turned billions on borrowed money into the dream of owning a home for millions of Chinese citizens.

It started project after project in every Chinese province, sold apartments years before completion and raised enough money to stay just one step ahead of massive interest bills.

The party is over. Years of aggressive borrowing clashed with Beijing’s tough deleveraging, leaving the giant developer on the verge of collapse. The construction of Evergrande projects in many cities has ceased. The company faced a litany of complaints and protests from suppliers, small investors and home buyers who sunk their savings in real estate the company promised to deliver.

Cash is so tight that the developer said this summer it started paying bills to contractors and suppliers with unfinished apartments instead of real money. A paint supplier based in southeast Fujian province said Evergrande recently paid $ 34 million in bills on three unfinished lots the supplier is trying to sell. At a construction company in Wuhan, more than 200 employees were forced to cut their salaries because some of Evergrande’s bills were overdue, a company manager told the Wall Street Journal.

Past and current employees say layoffs add up and free meals Evergrande provided for employees at headquarters have been canceled. In the central Chinese province of Hubei, Evergrande has urged the local government to take over funds held in escrow from homeowners so that they cannot be seized in litigation with creditors, according to people familiar with the matter.

Evergrande did not respond to the journal’s requests for comments. The company announced on Sept. 14 that its home sales have slowed significantly since June, its asset sale plans have failed, and it has hired financial advisors – a move that brings it closer to a potential debt restructuring.

The impending collapse is a microcosm of China’s overheated real estate market, where prices have been rising for years. Evergrande’s problems – and their impact on the economy and social stability – are the biggest test of Beijing’s rejuvenated campaign to end debt-fueled speculation and stop the rise in house prices as the government seeks to reduce inequality and housing for the elderly Keeping masses affordable.

Karen Li, a 37-year-old in the southern Chinese metropolis of Shenzhen, where Evergrande is headquartered, said she received the full purchase price of 1.4 million yuan, or about $ 216,800, for an area of ​​400 square meters three years ago paid for an apartment in one of its high-rise developments. Ms. Li, who works in retail and has not yet owned her first home, said she was informed of the construction delay last month.

« I thought it was reliable because it was a big company, » she said, adding that the property giant’s worsening liquidity crisis has put the project’s completion date into question. « This is a disaster for any normal family. »

Evergrande said on Sept. 13 that it is facing unprecedented difficulties and is doing everything in its power to restore normal operations and protect customers.

Market participants increasingly believe that Beijing will fail Evergrande and cause losses to its shareholders and bondholders, but find a way to protect the many people who have paid for unfinished homes.

Research firm Capital Economics estimates that Evergrande has pre-sold more than $ 200 billion worth of homes worth $ 200 billion, and said one result could be a managed restructuring that saw other developers on the unfinished projects of the company.

The company had $ 89 billion in outstanding debt at the end of June, about 42% of which will fall due in less than a year, according to its latest financial results. Evergrande’s total debt burden is the greatest for any publicly traded property management or development company in the world, according to data from S&P Global Market Intelligence.

« It would be the wrong message if [the authorities] intervened at this point to prevent a default, » said Julian Evans-Pritchard, chief China economist at Capital Economics. « It seems very unlikely that you would be helping a private company … this is in a sector that you are trying to curb, » he added.

The 25-year-old conglomerate epitomized China’s real estate boom and corporate debt. It opened to business when the country began adopting private home ownership and built homes primarily aimed at individuals with modest incomes. Many people stood in line for hours to buy an Evergrande apartment and often paid full cash upfront for houses that took years to complete.

The company’s founder, chairman, and largest shareholder, Xu Jiayin, grew up in an impoverished village in central Henan Province. He studied hard, went to college, and later worked for a state steel company. When he was 37 years old, he founded Evergrande, whose Chinese name means « steady » and « great », in the southern city of Guangzhou and became known professionally as Hui Ka Yan, the Cantonese phonetic spelling of his Chinese name.

Alumni and others who have worked with Mr. Hui previously described him as a workaholic with high expectations and a tendency to take risks and make bold bets. He also had good connections with wealthy people in Hong Kong’s business community who were active buyers of Evergrande’s stock and debt.

When the company went public in Hong Kong in 2009, it announced to potential investors that « rapid property development » was one of its key business strategies that helped maximize its investment returns.

Evergrande bought hundreds of lots and sold more homes than any other developer, and posted record sales year after year as home prices skyrocketed.

« Development is the absolute principle, » Hui said in a speech to staff in 2017, quoting the late Supreme Leader Deng Xiaoping. This, coupled with the idea that “cash is king”, has ensured the steady and rapid development of the company, he said. By the end of 2018, Evergrande had built projects spanning more than 33,000 acres across China, three times the number just four years earlier.

The company borrowed generously from banks and global investors, and paid interest rates on US dollar junk-rated debt that often hit double-digit percentages. It expanded into theme parks, health services, bottled water production, and electric vehicle construction. She once hired Hong Kong actor Jackie Chan to promote her bottled water and bought a professional football club in her home province.

The property developer also financed the construction with the help of short-term borrower’s notes, so-called commercial bills, which he issued to building contractors and building material suppliers.

As debt built up, Evergrande paid billions in dividends to shareholders, with most of that money going to Mr. Hui as its largest shareholder. The payouts, as well as the value of his shares, helped him become one of the richest men in China. As of October 2018, he has received more than 34 billion yuan, equivalent to $ 5.3 billion, in dividends. In 2019, he stated that the company would start producing electric vehicles and aim to become the world’s largest player in the fast-growing industry.

Evergrande ran into problems during the coronavirus pandemic last year, which led to lockdowns in China that dampened property sales for months.

Evergrande had regularly offered discounts on its apartments and launched more aggressive promotions – in some cases up to 30% off advertised prices – to get cash in the door.

She also encouraged her own employees to buy their homes. In a campaign dubbed « Wealth Creation » for its workers, Evergrande ran a raffle where winners were selected to buy apartments at a 50% discount.

The company has managed to post another record year in sales and report contract sales of the equivalent of 112 billion US dollars for 2020, 20% more than last year.

Trouble was brewing elsewhere. Evergrande’s stocks and bonds lost value last fall after documents circulated online warning of an impending cash crisis at the real estate giant. The documents appeared to show Evergrande’s communication with the local government warning of potential risks if it fails to finalize a flagship subsidiary’s proposed listing.

The company had sold stakes in its flagship real estate development unit to various strategic investors a few years earlier and promised them that the unit would go public in Shanghai in early 2021 or repay it up to the equivalent of $ 19 billion.

Evergrande condemned the documents as falsified and subsequently said that most of these investors had agreed not to force them to spit out the funds.

His problems weren’t over yet. China’s authorities last year set the so-called « three red lines » for property developers – certain leverage ratios that must be avoided – that Evergrande violated. The rules prevented the company from taking on new debt.

Last June, concerns about Evergrande’s finances surfaced again, causing bond and stock prices to plummet again. Internet users shared posts describing deep discounts on apartment prices offered by Evergrande. The company said it doesn’t offer widespread exceptional discounts.

On July 1st, Mr. Hui performed publicly at the Chinese Communist Party’s 100th anniversary celebrations in Beijing. His presence at the country’s most important event of the year should show the goodwill of Chinese leaders and allay concerns about his company, some political observers said.

Evergrande posted photos of the 62-year-old chairman smiling in a dark blue jacket in Tiananmen Square on its website, and boasts of more than 35 years as a party member. He was quoted as saying that he would continue to run his business well and be devoted to the common good.

The sell-offs of stocks and bonds deepened over the summer. Evergrande’s liquidity problems worsened, forcing it to pay some of its suppliers and contractors with apartments it had not sold. In mid-August, financial regulators summoned Evergrande’s top executives and asked them to resolve the company’s problems without disrupting the financial and real estate markets.

The company is trying to outsource other assets to raise cash and is in talks to sell part of its electric vehicle business, the market value of which has fallen more than $ 80 billion since a recent high.

Stephen Sum, who runs a real estate agency focused on China’s Greater Bay Area, said Evergrande’s troubles had hurt the entire real estate sector. « It’s like playing the Monopoly game, » he said of the developer’s survival strategy. In the real estate board game, players who are short of cash have to sell their real estate to avoid going bankrupt.

The business of Mr. Sum’s Hong Kong-based firm, which markets homes from many property developers, has halved since bad news about Evergrande hit the headlines. He said the news made people generally more cautious about buying property.

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