Every once in a while a company grows so big and messy that governments fear what would happen to the broader economy if it were to fail. In China, Evergrande, a sprawling real estate developer, is that company.To get more
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Evergrande has the distinction of being the world’s most debt-saddled property developer and has been on life support for months. A steady drumbeat of bad news in the recent weeks has accelerated what many experts warn is inevitable: failure.
Ratings agency Fitch said this week that default “appears probable.” Moody’s, another ratings agency, said Evergrande is out of cash and time. Evergrande is faced with more than $300 billion in debt, hundreds of unfinished residential buildings and angry suppliers who have shut down construction sites. The company has even started to pay overdue bills by handing over unfinished properties.
Observers are watching to see if Chinese regulators make good on their pledge to clean up the country’s corporate sector by letting “debt bombs” like Evergrande collapse.
Its billionaire founder, Xu Jiayin, is a member of the Chinese People’s Political Consultative Conference, an elite group of politically well-connected advisers. Xu’s connections probably gave creditors more confidence to keep lending money to Evergrande as it grew and expanded into new businesses. Eventually, though, Evergrande ended up with more debt than it could pay off.
In recent years, it has faced lawsuits from homebuyers who are still waiting for the completion of apartments they partially paid for. Suppliers and creditors have claimed hundreds of billions of dollars in outstanding bills. Some have suspended construction on Evergrande projects.
Evergrande might have been able to keep going if it weren’t for two problems. First, Chinese regulators are cracking down on the reckless borrowing habits of property developers. This has forced Evergrande to start selling off some of its sprawling business empire. That’s not going so well. It has yet to sell its electric vehicle business, despite talks with prospective buyers. Some experts say buyers are waiting for a fire sale.
Second, China’s property market is slowing and there is less demand for new apartments. This week the National Institution for Finance and Development, a prominent Beijing think tank, declared the property market boom “has shown signs of a turning point,” citing weak demand and slowing sales data.
Evergrande has slashed prices on new apartments but even that has failed to entice new buyers. In August it made one-quarter fewer sales in than it did a year ago.
Beijing will be tempted to say “no,” but a collapse could cause serious damage, leaving homeowners, suppliers and domestic investors — potentially numbering in the millions — unhappy. And Beijing has ultimately moved to shore up other large companies with big problems in the past.
For years many investors gave money to companies like Evergrande because they believed that, at the end of the day, Beijing would always step in to rescue it if things got too shaky. And for decades, the investors have been right. But over the past several years, authorities have shown greater willingness to let companies fail in order to rein in China’s unsustainable debt problem.
Authorities hauled Evergrande executives into a meeting last month and told them to get its debt in order. They have also continued to tell its banks to scale back their lending to the developer.
