Evergrande, the roots of a crisis that is shaking China

China Evergrande Group has the distinction of being the most indebted real estate developer in the world for months now, and the succession of bad news seems to end in one result: bankruptcy .

Rating agency Fitch said this week that default "looks likely". Moody's, another rating agency, said Evergrande ran out of money and time.

Evergrande faces over $ 300 billion in debt, hundreds of unfinished residential buildings, and angry suppliers who have closed construction sites. The company even started paying suppliers by giving them unsold real estate, a measure of the company's desperation.

We know that the Chinese government has allowed the company to negotiate a redefinition of payment terms with banks and creditors in general, an option that Evergrande took advantage of immediately. At the same time, however, Beijing would like to eliminate excessively indebted and unprofitable companies. A contradiction that the government will have to resolve in some way.

How did Evergrande become a problem for the Chinese economy, indeed the world one?
In its glory days a decade ago, Evergrande sold bottled water, owned China's top professional soccer team, and even entered the pig farming business. Evergrande had become so large and chaotically diverse that it entered the electric car industry, even though the launch was postponed. A lack of strategic focus that certainly helped the crisis. At the same time Evergrande was in an excessively mature sector which, however, still concentrates 2/3 of the wealth of Chinese families. To make a comparison, Italian families have less than half of their wealth in real estate which, among other things, have much lower valuations than China. This explains the weight in Evergrande's Chinese society.

That's not all: its founder, billionaire Xu Jiayin, is a member of the Chinese People's Political Consultative Conference, an elite group of politically well-connected advisors. The connections in Xu's politics have likely given creditors the confidence to fuel the company's disproportionate growth that, over the past 15 years, has made it the clay juggernaut it is now.

In recent years, it has faced legal action from homebuyers who are still waiting for the completion of the apartments they paid for upfront. Suppliers and creditors have claimed hundreds of billions of dollars in outstanding invoices. Some have suspended the construction of the Evergrande projects, leaving it with a handful of real estate in the middle, that is, of flies.

Why is the company in so much trouble now?
Evergrande could have continued on its way unstoppable, had it not been for two problems.

• First, the credit crunch imposed by Chinese regulators on the real estate sector, which forced Evergrande to sell many unfinished properties without even paying back the investment costs;
• Secondly, the fatigue of the Chinese real estate market, accentuated by the change in the demographic trend, which does not guarantee the continuous growth in prices that has occurred so far.

Much of Evergrande's assets come from apartments sold on paper, which puts the company on the path to an immense number of lawsuits from unsatisfied buyers. According to research by REDD Intelligence, Evergrande has nearly 800 unfinished projects across China and up to 1.2 million people who are still waiting to move into their new homes. Just think what it means for the government to have 1.2 million families angry, indeed furious. Let's combine the fact that in August the company sold 25% of the properties compared to previous years and we have the road to bankruptcy as a result.

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The article Evergrande, the roots of a crisis that is shaking China comes from ScenariEconomici.it .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/evergrande-le-radici-di-una-crisi-che-sta-facendo-tremare-la-cina/ on Sat, 11 Sep 2021 08:34:14 +0000.