With Three-Fourth Of Household Wealth In China Locked Up In Housing, Implosion Of Real Estate Giant Evergrande Sparks Fear Of Financial Contagion

·3-min read

Evergrande, China's second-largest real estate company with $110 billion in sales last year, is by some estimates the most indebted property group in the world. The real estate developer is faced with more than $300 bn in debt, nearly 800 unfinished residential buildings, angry suppliers who have shut down construction sites, nearly 1.2 million buyers many of whom who have partially paid for their properties have filed lawsuits.

Investors and institutions had in the past backed companies like Evergrande because they believed that Chinese government would step in to rescue if things went awry. But the government has increasingly displayed willingness to let companies fail and has made tough noises on Evergrande.

The share price of Evergrande, an embattled Chinese property developer, plummeted by as much as 17% today in Hong Kong trade as investors weigh up whether the group’s massive debt crisis could trigger a ripple effect across China’s real estate sector and financial system.

Evergrande, China's second-largest real estate company with $110 billion in sales last year, is by some estimates the most indebted property group in the world.

According to a report in The New York Times, the real estate developer is faced with more than $300 bn in debt, nearly 800 unfinished residential buildings, angry suppliers who have shut down construction sites, nearly 1.2 million buyers many of whom who have partially paid for their properties have filed lawsuits.

At least $200bn out of $300 bn in debt is cash that customers have paid in advance for homes that have yet to be completed.

Evergrande has sought an extension for at least three months on a trust loan interest payment to CITIC Trust, one of its major trust creditors, which was due in late August, citing tight liquidity. It has attempted to sell off some of its unfinished housing developments in order to pay down its debts. The company also announced that it is working on a recovery plan but is widely expected to default on two key upcoming bank payments.

The company's headquarters in the southern city of Shenzhen has been witnessed protests by angry investors who were demanding that their money be returned. Last week, retail investors in wealth management products related to Evergrande stormed the company headquarters, demanding their investments that could be as high as $6.19 bn. Several suppliers and contractors who have not been paid for their work on stalled real estate projects also joined the protests

Founded in 1996 by a former steel executive Hui Ka Yan in the city of Guangzhou, Evergrande had a meteoric growth in the past decade. Investors and institutions had in the past backed companies like Evergrande because they believed that Chinese government would step in to rescue if things went awry. But the government has increasingly displayed willingness to let companies fail and has made tough noises on Evergrande.

Chinese president Xi Jinping, who has pledged to address wealth disparities with the goal of achieving so called "common prosperity", has identified high housing prices as an area to address. Chinese government recently said that the cost of renting a home in cities should not rise by more than 5% a year - its first move to cap rental prices and part of efforts to provide more affordable housing.

Since 2020 the Chinese government unveiled measures to limit property developers’ borrowing which has resulted in many real-estate groups defaulting. It has forced Evergrande to start selling off some of its sprawling business empire.

Observers fear that if the Chinese government does not intervene to support Evergrande, till recently regarded as too big to fail (TBTF), it could spark off a deep economic crisis, especially in a country where three-fourth of household wealth is locked up in housing and where property market is critical to sustain activity in several sectors of the economy. China’s housing market, fuelled by years of cheap credit, is estimated to account for 16% of GDP.

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