Six keys to understanding Chinese real estate giant Evergrande’s crisis

These are some keys to understanding what is happening to the company that has become the China’s largest real estate developer:

1. The outbreak of the crisis

All alarm They skyrocketed in mid-2021 when Evergrande was no longer able to meet its payment obligations Offshore debt (“Offshore”) at a time when it had liabilities of more than $300,000 million (€304,257 million), resulting in hundreds of debts Litigation already a great situation uncertainty in the industry due to the impact of possible bankruptcy.

Like many other Chinese developers, Evergrande has been largely reliant on a high level of real estate since the real estate boom of the late 1990s Leverage (debt to finance operations) and off-plan sales to continue its developments: some analysts estimated that the company had sold 1.4 million pre-construction homes at the outbreak of the crisis, representing a value of more than 200,000 million dollars (184,403 million euros).

2. The “three red lines”

On the causes of Chinese real estate crisis The calls are noticeablethree red lines“, regulations promoted by Beijing in 2020 that aimed to limit access to financing to those promoters that have accumulated excessive liabilities, exceeded certain leverage levels or do not have sufficient liquidity to pay short-term debts.

This led to several companies in the sector facing a liquidity crisis, which contributed to the restrictions in force in those years on “Cool“the high housing prices that are unaffordable for many Chinese families, in line with the principle set by the country’s president, Xi Jinpingwho assured that “houses are for living and not for speculation”.

3. The market is not responding

The slowdown in growth afterZero Covid‘, the weight of the real estate sector on the GDPAccording to some people Analystsaround 30%, plus indirect factors and buyers’ distrust have led to a slowdown in the market, which is not only the promoter but also to families who see housing as an important investment instrument.

Given the situation, regulators have responded in recent months with measures to support the sector, guarantees for the delivery of houses sold off-plan and the lifting of several of the above restrictions, but the market has not responded: according to official data The commercial sales, measured in terms of area, collapsed 24.3% in 2022 and one more 8.5% in 2023.

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4. No restructuring agreement

Evergrande has presented a restructuring proposal 20 billion dollars (18,440 million euros) in unpaid offshore debt, but has postponed its creditors’ votes on several occasions, most recently last September, when it argued that sales were performing worse than expected and announced that it could not continue to take on new debt his Main subsidiary in China.

According to the American newspaper The Wall Street JournalThe latest round of negotiations with creditors ended in failure, leading to a large group of unpaid offshore bondholders supporting the liquidation request, which appears to have been crucial to today’s decision, which comes after seven postponements due to negotiations while the group sold assets to raise money.

5. Turbulence returns

The last few months have been particularly turbulent for Evergrande: it announced losses of more than 80 billion euros since 2021 and filed a lawsuit Bankruptcy in the USA. To protect its assets, its shares, frozen for a year and a half, have fallen almost 99.5% since their peak in October 2017.

At the end of September, its founder and president, Xu Jiayinwho became the richest man in China was named under “Suspicion of illegal activities“; Authorities also recently arrested the vice president of the group’s electric vehicle subsidiary and several employees of its asset management subsidiary.

6. What will happen now?

This is expected the Hong Kong judge which ordered the liquidation, today appoints a liquidator to take control of the company’s management and assets. However, some analysts are questioning whether this decision will be recognized by mainland China, where the group owns most of its assets. Assets, since the Hong Kong judicial system differs from China’s within its provisions semi-autonomous status.

“Recipients will have very limited enforcement powers over onshore assets (in mainland China) if they do not receive this recognition,” he notes. Lance JiangPartner at Ashurst LLPquoted by local newspaper South China Morning Post.

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