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It’s been a terrible week in Chinese real estate giant Evergrande’s fight to shake its reputation as the Lehman Brothers of China’s faltering economy – a comparison the company has been trying to avoid since 2021, when it struggled with its $330 billion in debt defaulted and sent shockwaves across markets around the world.
It began with confirmation on Sunday that the developer would be unable to raise funds after saying it would have to “reconsider” its restructuring plans amid an investigation by Chinese regulators – news that added to the biggest selloff in Chinese real estate stocks in nine months on Monday led.
Then on Thursday, the group and two of its major subsidiaries halted trading after Bloomberg reported that its billionaire CEO Xu Jiayin was being held under “residential surveillance” by Chinese police. Xu is also called Hui Ka Yan, the Cantonese pronunciation of his name.
The fall of Xu and his company – by some estimates he was China’s richest businessman in 2017 – reflects the rapid deterioration in the health of China’s real estate sector, which accounts for nearly a quarter of economic growth in the world’s second-largest economy.
The deluge of bad news suggests China’s efforts to achieve a “controlled demolition” of its most indebted company could spiral out of control – and lead to liquidation for the debt-laden developer.
As China’s economy slows, the responsibility lies with President Xi Jinping
Recent events have shown that “Evergrande is not in the good graces of the authorities,” said Janz Chiang, an analyst at Trivium China, a Beijing-based research company.
Aside from Xu, other current and former executives of China Evergrande Group and its subsidiaries are being investigated by Chinese authorities for possible violations of rules on the use of bank deposits, respected Chinese media outlet Caixin reported this week.
The investigation makes it difficult to reach a restructuring agreement. “Some creditors have already announced their intention to join a liquidation petition if Evergrande does not submit a new plan, which appears difficult given the ongoing problems,” Chiang said.
A messy end to the Evergrande saga would deal a blow to already shaken confidence in the ability of Xi Jinping, China’s powerful leader, to lift the slowing economy from post-pandemic malaise.
While many of the problems dampening growth predate Xi – Chinese real estate developers have been building too much and borrowing too much for decades – some close observers of China’s political economy blame the downturn on Xi’s trying to do so on too many fronts to carry out large, top-down renovations too quickly.
A no-deal outcome could shake confidence in a recovery for the embattled sector and reverse the optimism of other developers struggling to avoid a similar fate.
Evergrande files for Chapter 15 bankruptcy protection
China’s top-grossing real estate developer Country Garden, which has also flirted with defaults, reached an agreement with its creditors on Tuesday to postpone repayment of its domestic loans, Portal reported.
To end the downturn, cities across China are trying to boost property sales by making it easier for non-residents to buy homes, lowering payment requirements and raising mortgage rates.
There were also signs of recovery across the economy in August, as goods sales increased and exports stabilized. Many analysts are watching China’s upcoming week-long National Day holiday to see whether confidence returns among many Chinese consumers who remain eager to spend.
But many analysts consider the bursting of the real estate bubble to be the greatest threat to the economic recovery.
“[The property sector] is the biggest immediate problem, which may exacerbate structural issues such as confidence,” said Gary Ng, senior analyst at Natixis, a Hong Kong-based investment firm.
Evergrande is “a symptom of ongoing problems in the real estate sector, which could slow China’s economic growth in the future,” Ng said.