Zhao Lijun (assumed name) had managed to save a little money last year from his job in the machinery industry. Like the vast majority of Chinese citizens with some available salary, he was clear about what he wanted to spend it on: buying an apartment. Like many of his compatriots, Zhao was convinced that his was a safe investment. That real estate prices would never fall, despite what doom analysts might say from time to time. He did some research on the available flats in his city, Ningbo (one of the great ports in China), and found an off-plan that seemed perfect to him. The construction company, he thought, was a real guarantee. The second largest in the country: Evergrande.
"I chose it because it is in a good area, the surroundings are very nice and the price was very good," says Zhao about his flat. He paid 600,000 yuan (79,000 euros) for a two-bedroom, 83-square-meter model. He already owned another apartment, but his parents occupy it. "I bought this one for myself, but it also seemed like an excellent investment." The delivery date was 2023. Everything was going well. but this year construction stopped. “The floor is almost finished. The main structures were already completed, it only remains to finish the interior and put the decorative elements ”, laments the man.
Now Zhao, like hundreds of thousands of buyers, does not know when he will end up receiving the keys to his home. The delivery date of nearly 1.5 million homes built by Evergrande across China has been blown up. The giant's feet were made of clay: Over the past decade, like many other lightning-fast Chinese conglomerates, they turned to debt to finance an ambitious and disorderly expansion. Evergrande entered insurance, healthcare, theme parks, drinking water, soccer, electric vehicles, wealth management products ...
Today it is the most indebted real estate company in the world, with obligations of 305,000 million dollars (about 260,000 million euros, almost a quarter of Spanish GDP in 2020).
Its liquidity crisis, which has forced it to stop so many projects and prevents it from reimbursing numerous contractors, investors or buyers, has world markets in suspense and keeps the Chinese authorities very vigilant, although for the moment they are publicly silent.
The bankruptcy, which is already taken for granted, can infect the sector and threatens to leave important consequences in the growth, already weakened, of the second world power (and, therefore, could also impact the global economy) .
And it can generate problems of social stability, the great anathema for Beijing.
Demonstrations at the headquarters
Security agents march around the Evergrande headquarters in Shenzen, China, this Saturday.
Ng Han Guan / AP
For weeks now, as uncertainties about the company's future mounted, there have been demonstrations outside Evergrande's Shenzhen headquarters, buyers and contractors demanding their money back.
Many had invested in the group's wealth management products, which has lost more than 84% of its value on the stock market so far this year.
Nervousness, which caused panic in world markets this Monday, has increased again after a few days of calm starting this Friday, when it became clear that Evergrande had not been able to face the payment of 84 million dollars in interest for a foreign bond.
Eyes are now on how the Chinese government will handle the situation. Regulators face a double objective. On the one hand, "teach a lesson: that going into so much debt and making bad business decisions has a cost," says Julian Evans-Pritchard, from the consultancy Capital Economics. "I think they have already sent clear signals that there will be no bailout for the company or those who gave it credit," he adds. On the other, avoid the possible collapse of the real estate sector, something that would be a complete calamity for the second largest economy in the world. This industry represents more than a fifth of the Chinese GDP and accumulates more than 70% of the urban wealth of the Asian giant.
Over the past three decades, and especially the last, the company founded in 1996 by Xu Jiayin built a "reputation for highly creative financial engineering," recalls Dinny McMahon of the consultancy Trivium. Even in China's credit-addicted real estate sector, where debts total around 5 trillion yuan, Evergrande outperformed the rest. But it was tolerated: the brick generated wealth, served as an engine of the economy and nourished the coffers of local governments thanks to the collection of taxes from the sale of land. And furthermore, the company remained solvent, thanks to obtaining more loans and sales of wealth management products, in which it promised investors generous interest rates, up to 9%.
The trigger for the crisis came last August, from a political decision. Worried about a new rise in house prices - the umpteenth, in a country where brick is the preferred investment of families - the Chinese government began to take action on the matter to reduce, precisely, the level of indebtedness in that sector and imposed the so-called “three red lines” of the debt-to-cash ratio of companies, their assets and their earnings. Evergrande raped them all.
As a result, the giant was turned off the tap to access new credits.
He could only depend on his income to cover his obligations.
And a snowball began to roll that, over the months, has grown bigger and bigger despite the group's attempts to ditch investments or sell flats at bargain prices to get liquidity.
By this summer it was clear that he was having trouble paying some providers.
"People are going to see the play"
An Evergrande residential building under construction in Luoyang, on Sept. 16.CARLOS GARCIA RAWLINS / Reuters
“We started hearing in June that there were problems. And there was more and more news about it, ”says Ms. Li, a 39-year-old self-employed trader who last year bought an off-plan 114-square-meter apartment in an Evergrande development in the city of Zhenjiang, on the shores of from the Yangtze in eastern China. “The development in which I bought was the best seller last year in our city. But now every day new things come out about Evergrande. People go to the construction site to check on the floors. The last phase of urbanization is stopped. Ours is not completely stopped, but it is progressing now at a much slower pace than before, and I hope it doesn't end up stopping as well. The apartments were supposed to be delivered to us at the end of this year, but I don't know if they are going to get it, ”he laments.
Although the future of Evergrande is uncertain, all analysts take it for granted that the floors to be built will be finished, either at the hands of this developer or other rivals who take over their projects. "Ultimately, the authorities will step in to prevent a systemic crisis, and to ensure that families receive the homes they were promised," says Evans-Pritchard.
Otherwise, the country would risk social unrest. Evergrande's real estate projects "are not only a source of economic growth, but finishing them is a key factor in maintaining social stability in China," says McMahon. The priority will therefore be to ensure that in an Evergrande debacle, those who are best protected are small investors and home buyers. And that there is no collapse in real estate prices due to the public's mistrust when it comes to acquiring flats.
The central government has already instructed local governments to be ready to deal with "possible storms" resulting from the group's downfall,
The Wall Street Journal
published this week
. These authorities will have to create groups of experts to analyze real estate accounts in their respective territories, deal with local real estate companies to take over Evergrande projects, and establish law enforcement teams to monitor “mass incidents” ( protests) and public discontent, the newspaper reported.
Zhao has faith that the authorities will somehow solve the problem in his apartment.
My apartment does not have to be handed over to me until 2023 and, in any case, the local government has experience in restructuring companies.
I'm sure that, even if Evergrande goes down the drain, my development can be sold to others and finished ”.