Six keys to understanding the crisis of the Chinese real estate giant Evergrande

These are some keys to understand what is happening with the company, which became the China’s largest real estate developer:

1. The outbreak of the crisis

All alarms They jumped in mid-2021, when Evergrande defaulted on its offshore debt (‘offshore’) at a time when it had liabilities exceeding 300,000 million dollars (304,257 million euros), giving rise to hundreds of litigation already a situation of great uncertainty in the sector due to the implications of a possible bankruptcy.

Like many other Chinese developers, since the real estate boom of the late 90s, Evergrande depended largely on high levels of leverage (using debt to finance operations) and off-plan sales to continue carrying out its developments: some analysts estimated that the firm had 1.4 million homes sold before their construction when the crisis broke out, equivalent to more than 200,000 million dollars (184,403 million euros.

2. The ‘three red lines’

Among the causes of chinese real estate crisis the calls stand outthree red lines‘, regulations promoted by Beijing in 2020 that sought to limit access to financing to those promoters that accumulated excessive liabilities, exceeded certain levels of leverage or did not have sufficient liquidity to meet short-term debts.

This caused multiple firms in the sector to face a liquidity crisis that added to the restrictions applied in those years to “cool“the high price of housing, unaffordable for many Chinese families, in line with the principle established by the president of the country, Xi Jinpingwho assured that “homes are to live in, not to speculate on.”

3. The market does not respond

The slowdown in growth after the ‘zero covid‘, the very weight of the real estate sector on the GDPAccording to some people analystsaround 30%, adding indirect factors, and the distrust of buyers have translated into a slowdown in the market that worries not only the promoters but also to families, who see housing as an important investment vehicle.

Given the situation, regulators have responded in recent months with measures to support the sector, guarantees for the delivery of homes sold off plan and the withdrawal of multiple of the aforementioned restrictions, but the market is not responding: according to official figures, the Commercial sales measured by floor area plummeted 24.3% in 2022 and another 8.5% in 2023.

4. No restructuring agreement

Evergrande presented a proposal to restructure almost 20 billion dollars (18,440 million euros) of unpaid offshore debt, but it has postponed the votes of its creditors on several occasions, the last of them last September, when it argued that sales were evolving worse than it expected and announced that could not continue issuing new debt through its main subsidiary in China.

According to the American newspaper The Wall Street Journalthe last round of negotiations with creditors ended in a breakdown, which caused a significant group of holders of unpaid offshore bonds to support the liquidation request, something that seems to have been key in triggering the decision of today, which comes after seven postponements due to negotiations while the group sold assets to raise funds.

5. Turbulence returns

The last few months have been especially turbulent for Evergrande: it disclosed losses of more than €80 billion since 2021, filed a request for bankruptcy in the US. to protect its assets, and its shares, which were frozen for a year and a half, have now fallen almost 99.5% from their peak, reached in October 2017.

At the end of September, its founder and president, Xu Jiayinwho became the richest man in China, was placed under a kind of house arrest under “suspicions of illegal activities“; authorities have also recently arrested the vice president of the group’s electric vehicle subsidiary and several employees of its wealth management subsidiary.

6. What will happen now?

It is expected that the Hong Kong judge which has ordered the liquidation appoint a receiver today to take control of the company’s management and assets, but some analysts raise the question of whether this ruling will be recognized by mainland China, where the group has most of its assets. assets, since the Hong Kong judicial system is separate from the Chinese one within the framework of its semi-autonomous status.

“Receivers will have very limited enforcement power over onshore assets (located in mainland China) if they do not achieve this recognition,” he notes. Lance Jiangpartner at Ashurst LLPcited by the local newspaper South China Morning Post.

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