Evergrande is a major real estate developer in China, once the largest by sales (2016).
Currently, it is the world's most indebted developer with liabilities exceeding $300 billion.
Struggling to pay debts, causing significant global market concerns.
Recent Developments
December 2021: Evergrande declared a defaulter for the first time after failing to pay bond coupons.
Preparing for a formal debt restructuring process, one of China's largest and most complex.
Concerns extend beyond Evergrande to the entire property sector and the broader economy.
History of Evergrande
Founded by Chairman Hui in the late 1990s, stemming from humble beginnings in Henan province.
Rapidly expanded due to China's economic boom and easy lending conditions post-2008 financial crisis.
Currently controls land equivalent to five times the size of Manhattan with over 1,300 real estate projects across 280 cities.
Diversified into various sectors including new energy vehicles, football, and bottled water.
Debt Accumulation and Challenges
China's government started emphasizing debt control in 2015-2016, leading to the introduction of the "three red lines" in 2020 to limit developers' borrowing.
Evergrande faced liquidity challenges as early as September 2020, leading to concerns of a credit crunch.
The firm attempted short-term solutions, including deferring payments to suppliers.
By March 2021, further financial health concerns led to bond price drops and credit rating downgrades.
Market Reactions and Investor Concerns
Over $300 billion in liabilities includes $19 billion owed to offshore investors and $8 billion to local investors.
Many homebuyers have paid for properties that remain unbuilt, leading to protests demanding construction to restart.
Regulatory scrutiny increased, with Evergrande being summoned by Chinese regulators.
Despite previous government support, Hui's reliance on authorities diminished amid broader crackdowns.
Government Intervention
Hainan provincial government ordered demolition of illegal projects, symbolizing Evergrande's ongoing struggles.
Guangdong government dispatched a team to manage the crisis, sparking speculation about potential government control.
The HNA case serves as a potential model for Evergrande's restructuring.
Broader Implications for China's Real Estate Sector
Over a dozen Chinese developers have defaulted, raising concerns about the potential collapse of the real estate sector.
Chinese families heavily invest in property, making economic stability vital to prevent widespread discontent.
The government has attempted to stabilize the economy through liquidity release and eased borrowing restrictions for developers.
Conclusion
The traditional model of growth through debt in China is facing a reckoning.
Future investment in Chinese bonds may require clearer guidelines and improved financial health among developers.
The transition to a new economic paradigm in China is uncertain but indicates a significant shift from past practices.