For months, the liquidation of China Evergrande, the world’s most indebted real estate developer, unfolded like a slow train wreck.
After filing for bankruptcy protection last month – nearly two years after the company defaulted on payments to some creditors – Evergrande appeared to be on track for a more typical debt restructuring for creditors.
But the country is now more than $300 billion in debt and any semblance of normality has disappeared. In a filing with the Hong Kong Stock Exchange, Evergrande said Thursday that Hui Ka Yan, the company’s chief executive and billionaire founder, is suspected by authorities of criminal wrongdoing. The statement appeared to confirm news reports that Mr. Hui was under police surveillance, a type of house arrest, by Chinese authorities.
Once considered China’s largest real estate developer, Evergrande paid the price for years of reckless borrowing and overbuilding after the Chinese government cracked down on debt to limit the potential systemic risk of a housing crisis.
Evergrande became a symbol of the excess fueled by China’s real estate bubble. A lot of money was raised and spent lavishly. The company bought a soccer club and owned theme parks, while Mr. Hui flew around in a fleet of private jets.
But as Evergrande struggles to complete construction of hundreds of thousands of pre-sold apartments and scrape together funds to repay debts to suppliers, the company’s future now depends on China’s criminal justice system.
What is happening at Evergrande?
Evergrande is dealing with two big problems.
First, the company is negotiating a restructuring plan with foreign creditors to recoup more than $30 billion in defaulted debt and other claims. But reaching an agreement has proven difficult, particularly amid declining property sales that are putting pressure on Evergrande’s cash flow.
Last week, Evergrande canceled a series of meetings with creditors, noting that sales had “not been as expected” and that the company needed to reassess “the terms of the proposed restructuring.”
On Monday, Evergrande’s main Chinese subsidiary, Hengda Real Estate Group, said in a filing to the Shenzhen Stock Exchange that it had missed principal and interest payments on a $550 million bond due that day. Evergrande said over the weekend that it was unable to issue new debt due to an investigation by China’s securities regulator into Hengda.
But Evergrande’s efforts to get its debt under control are now being complicated by the second major problem facing the company: Current and former officials are the targets of criminal investigations.
This month, police in southern China said public security officers had arrested employees of Evergrande’s asset management department and imposed “criminal coercive measures.” Chinese news media also reported that authorities arrested the company’s former chief executive officer, former chief financial officer and former chairman of the company’s life insurance division.
While Evergrande did not say much about the investigation into these former executives, it did confirm the investigation into Mr. Hui. There was no mention of what crimes were being investigated.
The company also said its shares would not be traded until further notice. Evergrande shares had fallen by 60 percent in the previous two weeks.
How did Evergrande get into this mess?
Evergrande’s beginnings as a house builder were modest. Mr. Hui, a former steel factory worker, founded the company and oversaw its development over a quarter century into a real estate giant. Its rapid rise was a byproduct of China’s urbanization push, which sparked a construction boom fueled by huge debt to finance it all.
Like China’s other real estate developers, Evergrande had a business model that was great when things were going well. It borrowed to build and then paid off the debt when homebuyers invariably purchased properties. As Evergrande grew and its residential buildings mushroomed across China, so did its debt levels. It has expanded from the real estate industry. It built electric vehicles, ran dairy, grain and oil operations and even bought a football club.
But Chinese officials became increasingly concerned that real estate developers were growing so large and borrowing so excessively that the debt burden could wreak havoc on the country’s financial system if they failed. In 2020, regulators began making it harder for indebted real estate companies to continue borrowing. Evergrande’s business model, which was based on easy access to credit, collapsed.
A year later, Evergrande defaulted on payments. However, the company continued to sell real estate and develop electric vehicles. The company reported total losses of $81 billion in 2021 and 2022 before finally going bankrupt in August. In a semi-annual report, the company said it lost another $5.3 billion in the first half of 2023.
Why are Evergrande’s problems important?
Evergrande is certainly not an isolated case. More than 50 Chinese real estate developers have defaulted or failed to repay their debts in the past three years since the government cracked down on excessive borrowing by real estate firms.
And how Chinese officials deal with the fallout from Evergrande could shed light on how Beijing will deal with other real estate developers in similar trouble. Country Garden, once Evergrande’s main rival for supremacy in the industry, is also faltering.
Evergrande is also important because of its size and the amount of debt it still carries. While some of this debt belongs to foreign investors, much of it is in the hands of small or medium-sized companies – the backbone of China’s economy – and is still awaiting repayment.
Last week, the company said it still owed $82 billion to building materials suppliers alone. At a time when China is going south, Evergrande’s unpaid bills are a burden that is impacting the entire economy.