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What is Evergrande? Chinese property giant after fears of global sale

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HONG KONG Evergrande Group built a real estate empire on a mountain of debt. Now the Chinese property giant is in trouble and fears it could destroy the global economy with it.

Uncertainty spurred a market sale this week and has raised concerns about a crisis similar to that created in 2008 by the collapse of US investment bank Lehman Brothers. Experts say such comparisons are exaggerated, not least because the Chinese government exercises a much greater degree of control even over private companies like Evergrande.

But the plight of developers could deal a serious blow to the world’s second-largest economy, as Beijing faces what could be one of its biggest pre-elections.

‘Ponzi-si’

Evergrande limited to money has sold millions of apartments in China, growing into the middle class since it was founded in 1996 by billionaire Xu Jiayin, 62, and once the richest man in China. The company, headquartered in downtown Shenzhen, say has more than 200,000 employees, as well as about 1,300 projects in more than 280 Chinese cities.

For years, the model has worked.

Apartment buildings in China Evergrande Group Real Estate Development in Venice in Qidong, China, on September 21, 2021.Qilai Shen / Bloomberg via Getty Images

Evergrande built the property, sold it long before it was completed to Chinese customers eager for either a new home or a safe place to invest their growing income, and the company then used the money to build more.

With the boom in the real estate business, it also branched out into theme parks, bottled water and football ownership.

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It also amassed $ 300 billion in debt, equivalent to about 2 percent of China’s gross domestic product, making it the most indebted developer in the worldWith Now a slowdown in the property market and the efforts of the ruling Communist Parties to reclaim the Chinese economy have forced them to reckon with the Evergrande issues.

Sales are declining. Construction on some projects has stalled due to late payments. And company offices in China have been surrounded for weeks by angry protesters, many of them employees, who worry they may not get their investment in Evergrande’s property and financial products.

Beijing is reportedly asks local officials to prepare for the consequences of a total collapse.

Chinese economic growth is projected to weaken due to property slowdown caused by government pressure on industry to reduce dependence on borrowed money.Qilai Shen / Bloomberg via Getty Images

Some see the unrest as a necessary check on China’s overheated real estate industry.

As the property sector spiraled out of control, it was very difficult to shut it down because it was such an important source of growth, Michael Pettis, a professor of finance at Peking University in Beijing, said in an interview with NBC News on Thursday. Maybe now we are starting to see the beginning of a long and very difficult process to make the property sector a more normal part of the economy.

The property sector has been central to China’s explosive growth in recent years, accounting for a quarter of GDP in a country in which high-savings households have few other safe places to invest — nearly 70 percent of Chinese house property is owned. in real estate.

But developers like Evergrande convinced that Beijing would support them if necessary have become overly expanded, raising funds to cover current debt obligations in a Ponzin-like manner, Sara Hsu, a US-based visiting researcher at Chinas Fudan University specializing in Chinese economic development, said in an email.

Evergrande has been trying to cut its debt for several years, and Chinese officials have long been seen as a potential systemic risk. The company narrowly avoided a $ 13 billion crisis last year. This month, he again warned of a failure as he tries to raise the money he needs to pay lenders and suppliers.

It has tried to raise cash by lowering property prices and firing other businesses in which it has expanded, including an electric vehicle unit that has not yet sold a single car. Some investors have been offered real estate instead of cash. In a letter to employees that was greeted with skepticism, Xu vowed this week that his company would emerge from the darkness soon.

NBC News turned to Evergrande for comment.

‘The game has changed’

Although the Chinese government has saved other very large companies from failing in the past, its strategy is changing.

This is reflected in Chinese leader Xi Jinpings’s joint prosperity campaign to address the country’s wealth gap, which spans everything from affordable housing to curbing children playing video games. Xi has also expressed the desire that economic expansion be driven more by high quality growth such as consumption and exports and less by vacant apartments.

Last year, Chinese regulators introduced three red lines aimed at forcing real estate developers to improve their financial health.

Experts point out that if the Evergrande collapses, it is because the Chinese government is allowing it. The challenge for Xi is how to reduce industry debt and curb runaway housing prices, while also protecting China’s wider economy.

Analysts have already lowered the country’s growth forecast for the year, and investors will worry that the Evergrande crisis may not be an isolated event.

It is simply a bloated sector, said Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis in Hong Kong, in a telephone interview on Thursday. It should be reduced, but reducing China’s growth rate will undoubtedly suffer, there is no doubt about it.

The ruling Communist Party worries that rising debt accumulated during China’s boom years could cause problems as economic growth slows.Sheldon Cooper / SOPA Images / LightRocket via Getty

The growing consensus is that while Beijing cannot save the Evergrande itself, it will move to protect home buyers as well as smaller banks that could be destabilized by a default. Foreign investors are more likely to be left out in the cold.

They will not intervene and guarantee everything because they have tried to remove from the system this dependence on debt and property speculation, Pettis said. But on the other hand, they can not allow everything to collapse because it can spread very quickly.

U.S. officials have downplayed the risk Evergrande poses to global markets. Federal Reserve Chairman Jerome Powell said the company’s debt crisis looks very special to China.

There is not much direct exposure of the United States, the big Chinese banks are not extremely exposed, he said told reporters Wednesday after the two-day Fed policy meeting. But you would worry that it would affect global financial conditions through channels of trust and things like that.

Hsu also said that while Evergrande is likely to default on its offshore bonds in the coming weeks, the impact on the US economy would be minimal.

For China, what happens next is not a series of defaults between its big developers, but those developers will behave much better, Garcia-Herrero said.

The game has changed and they need to understand that.

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