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The world's most indebted real estate company, China's Evergrande, collapses

2021-09-09T04:06:43.759Z


The company itself, mired in a liquidity crisis, has warned of the risk of defaults, amid fears of a contagion effect


A woman walks past an advertisement for a housing development built by Evergrande in Hong KongTYRONE SIU / Reuters

Evergrande's problems are enormous. This company, one of the big real estate developers in China, seemed unbeatable until last year and was used to breaking records. But one of its records threatens to topple it: it is the most indebted firm in its industry in the world, with loads of 305,000 million dollars, and it is going through serious difficulties to face them. Among fears of a bankruptcy that could drag its sector down and leave serious consequences for the Chinese economy -construction is one of its pillars-, this week has already seen two consecutive cuts in the rating of its debt, reaching levels “very high ”default risk. This Wednesday,the financial intelligence consultancy REDD assured that the giant in low hours will stop paying the interest on its debt with two banks as of next day 21.

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On Tuesday, credit rating firm Fitch downgraded its valuation of Evergrande, and its subsidiaries Hengda Real Estate and Tianji Holding Limited from CCC + to CC, or "very high" level of default risk. The decline, Fitch said in a statement, “reflects our view that a default of some kind appears likely. We believe that the credit risk is high given its tight liquidity, the decline in contracted sales, the pressure to resolve the delay in payments to its suppliers and contractors, and the limited progress in the liquidation of assets ”. The day before, the rating agencies Moody's and China Chengxin International had also downgraded their valuation of the company, and Goldman Sachs recommended the sale of the shares of the real estate company.Its listing on the stock market this Wednesday fell to 3.08%.

These are low hours for Evergrande, but it was not always like that. The group's international name, a combination of English (

ever

, in that language, means “always”) and Spanish, already represented a declaration of principles and ambitions. Its founder, Xu Jiayin, is the fifth richest man in China, with a fortune valued last year at about $ 33 billion according to the list produced by Hurun magazine. Headquartered in Shenzhen, in southeastern China, it is present in 280 cities in the country. It directly employs 200,000 workers, and the jobs of another 3.8 million people depend on the company indirectly. His football club, known for years as Guangzhou Evergrande (now only Guangzhou FC), was the regular champion of national competitions.

Its rise was contributed by the exorbitant rise in house prices that China has experienced throughout this century, and which has continued to make the real estate market in large cities one of the least affordable in the world with respect to income level. middle of the inhabitants. An increase driven by the lack of alternatives for investment from savings: bank deposits do not pay interest and the stock market is still very unstable. The widespread belief that home prices never go down, they just go up, triggered the acquisition of real property: it is not uncommon for a homeowner to own several. Even today, the real estate and construction market represents 17% of Chinese GDP, if the sale of furniture and appliances is included.It is an essential source of income for local governments, which obtain 44% of their income from the sale of land and corresponding fees. This item represents 1.3 trillion dollars annually.

During the boom years, Evergrande diversified into all kinds of sectors, from food to insurance to amusement parks.

Some of his bets did not yield the expected performance: in 2019 he created a 2019 subsidiary for the development of electric vehicles (

China Evergrande New Energy Vehicle Group

) that has not yet commercialized any model.

Evergrande headquarters in Shenzhen city, Guangdong province of ChinaGettyImages

This expansion - similar, in its ambition and diversification, to that of other large Chinese private groups - was supported, in part, by debt and a business model of the parent company in which its construction projects were sold before they were completed. and with these revenues the following buildings were financed.

But the market has changed in the wake of the coronavirus pandemic.

In the last year, the Chinese housing market has seen enthusiasm for buying housing as an investment shrink.

In July, according to data from the consulting firm Capital Economics, the prices of new homes sold were 20% below their peak in the first quarter of this year.

And the Government has begun to intervene, alarmed at a debt that accumulates more than five trillion dollars among companies in the sector, and has imposed limits on the new indebtedness that these companies can incur.

Among other restrictions, Evergrande can no longer sell its buildings before they have been completed.

The company has lost around 70% of its value so far this year.

In August, its sales contracts - including those for assets offered as payment to its suppliers - fell 26% compared to the same month last year, according to figures released by the group last Friday.

In August, the People's Bank of China, the central bank, met with the group's leaders, concerned about the high level of accumulated debit between bank loans, payments to suppliers, investors and home buyers.

The authorities demanded that he "actively solve his debt problems."

Evergrande tries to divest its subsidiaries and, to obtain liquidity, sell its real estate at discounted prices.

The sale of assets has already allowed it to release about 25,000 million yuan (about 3,262 million euros).

But the group itself has warned of the possibility of defaults if it does not manage to get enough cash.

One of the great doubts about the real estate situation concerns how the Chinese government will respond.

If he will come to the rescue, given the size of the company and the possible “contagion effect”, or will he choose to abandon a group to its fate that, in the words of the consultancy Eurasia Group, is “the notorious example of irresponsible management of the debt and misconduct in the real estate market ”.

In Eurasia's view, "Beijing will seek to avoid a full Evergrande bailout, while remaining vigilant against systemic risks." But if the possibility of a panic situation were to be seen on the horizon that would force desperate sales and could endanger the entire sector - a prospect that would horrify the Government at any moment, but even more so when it prepares the renewal of the mandate from President Xi Jinping next year-, "Beijing would intervene in advance to try to avoid this scenario, but for now it seems to be holding back," the consultancy considers.

Source: elparis

All business articles on 2021-09-09

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