In the past decade, China has captured the global spotlight with its rapid economic development, mega construction marvels, and technological advancements. However, over the last two years, the dynamic superpower garnered global attention for all the wrong reasons.
The speculated collapse of China’s second-largest real estate firm is the latest unfortunate event in the country’s series of unfortunate incidents. As of September 19, the Evergrande Real Estate Group is threatened by defaulting on an estimated $300 billion debt. In recent years, the company has grown unrestrainedly in both size and assets, leading to a mountain of debt.
Evergrande, formerly known as the Hengda Group, was founded in 1996 by the Chinese business tycoon Xu Jiayin. The real estate giant owes much of its initial success to the urbanization wave that had swept China towards the end of the 20th century. In its Initial Public Offering on the Hong Kong Stock Exchange, the company raised $722 million. Nevertheless, the firm became widely known when it acquired Guangzhou Evergrande F.C. in 2010 and acquired many top players. As a major player in the Chinese economy, Evergrande holds stakes in several other sectors, such as sustainable energy, agriculture, health, tourism, and food and beverages. Xu is estimated to have a personal fortune of $10.6bn by Forbes magazine.
Once one of the world’s most valuable real estate company, the news of Evergrande’s financial misfortune roiled the global economy. Experts say that the firm is now the world’s most indebted real estate developer. The company is due to make two interest payments, the first one on September 23 for $84 million and the second one reportedly for $47.5 million on September 29.
Evergrande’s shares plunged to a six-year low in Hong Kong this week which worried investors. The news of the real estate giant’s downfall created public unrest. Homebuyers and investors staged widespread protests at offices located across China. Earlier this month, the company informed its investors that it would have to sell off some assets to avoid a risk of defaulting.
It was however no surprise to many that the real estate giant collapsed. In 2012, Andrew Left, CEO and founder of Citron Research was banned from trading in the Hong Kong stock market for writing a critical report on Evergrande. According to Left, the collapse of the giant was long overdue. He also accused the company of accounting fraud. However, the report was deemed false and misleading, leading to Left being banned for five years.
When Evergrande ventured into the real estate market, it had to compete with China’s well-established real estate developers. The company did not have the sufficient manpower nor the financial resources to go head-to-head with its competitors. Thus, the company adopted a business model where it would borrow loans from banks to develop properties and pay off these loans with interest from the profits earned. The Evergrande's success could be attributed to the affordable housing it offered in the heart of major cities without sacrificing luxury.
The collapse of Evergrande has been compared to that of Lehman Brothers in 2008, where a respected American bank collapsed under crushing debts and rattled global economies. The ground reality looks very grim. Ongoing construction activities have been brought to an abrupt halt as the workers have not received their wages since April, 2021. Nevertheless, Xu has assured all investors and homebuyers that the company will not go under and all ongoing construction activities will resume shortly. “The company is facing unprecedented difficulties and will do everything possible to resume work”, he added.
Evergrande’s downfall can have catastrophic impacts on the Chinese economy. The Chinese government has warned the real estate giant to not default on their payments. In recent years the group has fostered strong political connections which, have led many to speculate, is Evergrande too big to fall?
The International Monetary Fund (IMF) has been closely monitoring the economic crisis that has been developing in China. IMF Chief Gita Gopinath believes the Evergrande default could have devastating impacts on the Chinese economy. Nevertheless, the country is believed to have the right resources and policies to avoid a Lehman Brothers fiasco.
Financial analysts and economists believe a total restructuring is a need of the hour for Evergrande. As it stands, the deadline for the first payment has passed. Evergrande has defaulted on their first repayment of $84 million. They will now be provided a grace period of 30 days, which, if they default, shall mark the end of China’s second largest real estate developer.
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