China's second largest real estate developer Evergrande is about to end.
Grown on the wave of the Chinese real estate boom, expansion and debt become its undoing.
Shenzhen / Munich - From a successful real estate developer and glamorous owner of the most successful soccer club in Asia to an insolvent problem group: China's second largest real estate developer Evergrande has taken an unprecedented nosedive. The company has amassed the world's largest mountain of debt in the industry: more than $ 300 billion. On Monday, around 100 investors stormed the Evergrande headquarters in Shenzhen, southern China *, demanding overdue payments. Pictures on the microblog service Weibo showed crowds harassing a manager in the company lobby and filming the scene with their smartphones.
In neighboring Guangzhou, angry home buyers surrounded an office and demanded that a disused Evergrande construction site be continued. As is customary in China *, they made large down payments years before their apartments were ready to move into. According to data from the analysis company REDD Intelligence, almost 800 Evergrande projects across China are still unfinished. According to REDD, up to 1.2 million customers are currently waiting to move into their new apartment - and now fear that this will never be possible. Most home buyers have become heavily indebted in anticipation of ever increasing property prices - also because owning a home is one of the most important goals in life in China.
Every Tuesday Evergrande has to testify on the Hong Kong Stock Exchange, where it is listed.
Last week, the company admitted that the group would become insolvent if it does not get immediate access to liquidity.
This Tuesday followed the forecast that sales would continue to decline in September and that there would be no further progress in the sale of parts of the company.
Founder Xu Jiayin has to break up his conglomerate in order to service at least some of his debts.
Among other things, he is looking for a buyer for the loss-making electric car division.
Evergrande crash: the financial world fears bankruptcy and debt restructuring
The world now fears a collapse of the group. Since the beginning of the year, the Group's share value has fallen by three quarters. International rating agencies like Fitch downgraded Evergrande bonds to junk levels. Fitch said the company's bankruptcy "appears likely". Debt rescheduling seems inevitable. Because at the moment Evergrande can neither pay banks nor its suppliers.
The greatest danger for international investors are the outstanding bonds of the company. The financial service
Bloomberg
already compared the scenario with the dystopian hit series “The Hunger Games” and its hunger games for life and death. Because as long as Evergrande's bonds are not actually in default, Xu can choose who he wants to repay to first. Whoever trumpets politically correct slogans loudly, agitates on social media or threatens street protests will likely be paid out first, speculates
Bloomberg
. Foreign investors are unlikely to be - they enjoy a lower priority, according to financial experts. This is not the case with suppliers or employees who Evergrande persuaded for years to buy wealth products from a subsidiary called Evergrande Wealth: "It's okay if I run out of things - but Evergrande Wealth investors cannot be left without something," said Xu Jiayin, according to
Bloomberg
on Friday. Analysts assume that buyers of Evergrandes dollar bonds will only get a quarter of their investment back.
And cooperation partners are also at risk.
Evergrande has been operating a joint venture with the German automotive supplier Hella in Shenzhen for the development and production of battery management systems since 2020.
In June, Hella - which has been part of the French Faurecia group since August - announced an expansion of the cooperation.
Evergrande also founded a joint venture with the German drive specialist Hofer Powertrain in 2019, based in Berlin.
What will become of these joint ventures is completely uncertain.
China's Evergrande: too big to fail?
Evergrande is actually a typical case of “too big to fail” - too big to fail. Its failure would shake China's real estate market; it would hit banks as well as millions of homeowners. The Evergrande case is also a beacon for the industry, which has heated up both the credit and construction industries in the country by building huge residential complexes on credit. Housing prices rose immeasurably, especially in large cities; Small apartments in new high-rise buildings on the outskirts of Beijing * can cost the equivalent of up to 600,000 euros - and that in an emerging country with still relatively low incomes. Banks therefore gave the developers credit for credit. The rising prices also made it more attractivespeculating in real estate rather than stocks on the country's notoriously volatile stock market - which only fueled prices further. Experts have been talking about a bubble for years. But this has not burst - so far.
But other real estate groups have already been drawn into Evergrande.
For example, the successful office building developer Soho from Beijing: The US investment giant Blackrock actually wanted to take over Soho for three billion US dollars.
But on Monday, Blackrock stopped the deal, and Soho shares slipped 35 percent, according to a report by the British Guardian.
Evergrande case: test for Xi Jinping - can Beijing go bankrupt?
Evergrande is therefore the most difficult test to date for the willingness of President Xi Jinping * to let over-indebted companies fail.
Beijing has so far been silent on the case.
A rescue package would tacitly bless a daring economy on credit.
Instead, Beijing began some time ago to use rules to drive out excesses in the sector.
Limits when buying a home - only one second home is allowed per couple - are intended to curb speculation.
At times, Beijing restricted the sale of building land in many cities.
Beijing recently introduced a rent brake.
The authorities are also taking action against the state banks' excessive lending to real estate companies.
The ratio of liabilities to assets of the real estate companies must not be more than 70 percent, the net indebtedness not exceed 100 percent.
As early as April of this year, Evergrande was no longer able to meet such requirements - and therefore no longer received any new loans.
The drama began.
Evergrandes Xu Jiayin: Well-connected entrepreneur
Evergrande founder Xu is well connected. When Xi Jinping celebrated the 100th birthday of the Communist Party * in the summer, Xu was standing with the VIPs at the Gate of Heavenly Peace in Beijing. The son of a woodcutter has been a party member for 35 years. He invested in government-sponsored industries such as electric cars and traditional Chinese medicine. He donates a lot of money to charity and shares Xi's love for football * - as he demonstrated by buying the football club, which was henceforth called Guangzhou Evergrande. With the help of expensive players like Lucas Barrios, who came from BVB in 2012, the club has been Chinese champions several times and won Asia's version of the Champions League.
In 2017, the Chinese magazine Hurun * listed the now 62-year-old Xu as the richest man in the country, with a fortune of 43 billion US dollars.
But as early as April 2020, according to the US magazine Forbes, this fortune had practically halved - among other things due to Corona and the beginning doldrums on the real estate market.
Evergrande: Expansion resulted in an opaque conglomerate
In 1996, Xu - also known internationally as Hui Ka-Yan, as his name is spelled in the local dialect of his home province of Guangdong * - founded Evergrande in the provincial capital of Guangzhou.
The company grew and, according to a company website, now owns more than 1,300 projects in more than 280 cities.
Evergrande mainly focused on upscale residential complexes and shopping centers.
Rising prices and cheap loans made it possible.
Over the years, Evergrande expanded into countless other industries from mineral water, health products to baby milk;
a conglomerate with dozens of subsidiaries emerged.
The latest prestige project should be electric cars.
Evergrande's health division (!) Took over a startup, then the group bought the Swedish-Chinese NEVS, which had emerged from the traditional Saab brand, and founded its own electronic brand called Hengchi.
Hengchi was to build six models, the first of which were presented at the Shanghai auto show in April.
Now Xu is looking for a buyer for the loss-making electronics subsidiary.
+
Experiment with electric mobility: Hengchi 1 model from Evergrande's electric subsidiary
© IMAGO / VCG
It's on the home stretch of the decision. According to a report by the
South China Morning Post,
Evergrande has
now
hired
star US lawyers who specialize in spectacular bankruptcies in addition to a Hong Kong law firm: the California-based law firm Houlihan Lokey, which specializes in debt rescheduling, also advised Lehman Brothers when it collapsed almost 15 years ago triggered the global financial crisis. China's authorities are also starting to investigate the conglomerate's finances. Rescue or bankruptcy - this question should soon be answered.
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