Why the fallout from the Evergrande crisis is worrying.
The 2020-2022 Chinese property sector crisis is an current financial crisis sparked by the financial difficulties of Evergrande Group and other Chinese property developers, in the wake of new Chinese regulations on these companies' debt limits. Following widespread online sharing of a letter in August 2021, in which Evergrande supposedly warned the Guangdong government that it was at risk of experiencing a cash crunch, shares in the company plunged, impacting global markets and leading to a significant slow-down of foreign investment in China during the period August to October 2021.
After rumours of financial difficulties at Evergrande surfaced in the summer of 2021, the company attempted selling assets to generate money. This strategy failed in October 2021, however. After numerous missed debt payments by Evergrande and a number of downgrades by international ratings agencies, Evergrande finally defaulted on an offshore bond at the beginning of December, after a one-month grace period had elapsed. The ratings agency Fitch then declared the company to be in "restricted default".
Thousands of retail investors, as well as banks, suppliers, and foreign investors are owed money by the company. In September 2021 the developer had 2 trillion RMB (310 billion USD) in liabilities.
Beijing is intervening to prevent a disorderly collapse of the indebted real estate group that could wreak havoc on the world's second biggest economy. Fitch Ratings declared that the embattled property developer has entered "restricted default," reflecting the company's inability to pay overdue interest earlier this week on two dollar bonds. The payments were due a month ago, and grace periods lapsed Monday.
Evergrande's apparent failure to pay that interest has revived fears about the future of the company, which is reeling under more than $300 billion of total liabilities. Evergrande is massive — it has about 200,000 employees, raked in more than $110 billion in sales last year, and owns more than 1,300 developments in more than 280 cities, according to the company.
Analysts have long been concerned that a collapse could trigger wider risks for China's property market, hurting homeowners and the broader financial system. Real estate and related industries account for as much as 30% of GDP.
There's already plenty of evidence that Beijing is taking a leading role in guiding Evergrande through a restructuring of its debt and sprawling business operations. The local government in Guangdong province, where Evergrande is based, said late last week that it would send officials into the firm to oversee risk management, strengthen internal controls and maintain normal operations. Earlier this week, Evergrande announced it would set up a risk management committee, including government representatives, to focus on "mitigating and eliminating" future risks. Among its members are top officials from major state-owned enterprises in Guangdong, as well as an executive from a major bad debt manager owned by the central government.
Chinese authorities have taken other steps as well. The central bank on Monday announced that it would pump $188 billion into the economy, apparently to counter the real estate slump.
The massive restructuring is going to come with some pain.
Beijing has made it clear that its priority is protecting the thousands of Chinese people who have bought unfinished apartments, along with construction workers, suppliers and small investors. It also wants to limit the risk of other real estate firms going under. Investor fears over Evergrande's default have pushed up financing costs for other developers
, as yields on offshore Chinese corporate debt surge. At the same time, the government has been trying for more than a year to rein in excessive borrowing by developers — and so won't want to dilute that message. That means the government may be "happy to see the firm itself go under and investors take a haircut," said Louis Kuijs, head of Asia economics at Oxford Economics, in a research note on Friday.
Chinese regulators have blamed Evergrande's crisis on the company's leaders. Its problems were the result of "poor management and blind expansion," the central bank and the country's securities regulator said Monday in public statements, reiterating previous criticisms.
Spillover to growth
It's a "delicate balancing act" to allow Evergrande to fail while minimizing any economic or financial impact, especially given the broader downturn in real estate that has already seen several other developers default, including Kaisa Group this week.
New home prices in China fell in October for the second consecutive month, according to figures from the National Bureau of Statistics. The fall in September was the first in six years on a month-on-month basis. A major slowdown in the property sector, along with other factors, could drag China's GDP growth next year down to 4.3%, according to Ting Lu, Nomura's chief China economist. That's much lower than the firm's estimated growth for 2021 of 7.8%.
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