Five keys to understanding the crisis of the Chinese real estate giant Evergrande

The alleged house arrest of Hui Ka-yanthe founder and chairman of the indebted Chinese real estate giant Evergrandeor the difficulties that the company faces in carrying out its restructuring plan are the latest chapters of a crisis that dates back more than two years.

These are some keys to understand what is happening with the company, which became the largest real estate developer in China:

1. The outbreak of the crisis

All the alarms went off in mid-2021, when Evergrande defaulted on its offshore debt at a time when it had liabilities exceeding US$300 billion, giving rise to hundreds of lawsuits and a situation of great uncertainty in the sector due to the implications of a possible bankruptcy.

Like many other Chinese developers, since the real estate boom of the late 90s, Evergrande depended largely on high levels of leverage (using debt to finance operations) and off-plan sales to continue carrying out its developments: some analysts estimated that The firm had 1.4 million homes sold before construction when the crisis broke out, equivalent to more than US$200 billion.

2. The ‘three red lines’

Among the causes of the Chinese real estate crisis, the so-called ‘three red lines’ stand out, regulations promoted by Beijing in 2020 that sought to limit access to financing to those developers that accumulated excessive liabilities, exceeded certain levels of leverage or did not have liquidity. enough to meet short-term debts.

This caused multiple firms in the sector to face a liquidity crisis that added to the restrictions applied in those years to “cool” the high price of housing – unaffordable for many Chinese families – in line with the principle established by the country’s president, Xi Jinping, who assured that “Homes are for living in, not for speculation.”.

3. The market does not respond

The slowdown in growth after ‘zero COVID’, the weight of the real estate sector on the GDP – according to some analysts, around 30%, adding indirect factors – and the distrust of buyers have translated into a slowdown in the market which worries not only the developers but also the families, who see housing as an important investment vehicle.

Given the situation, regulators have responded in recent months with numerous measures to support the sector, guarantees for the delivery of homes sold off plan and the withdrawal of many of the aforementioned restrictions, but the market is not responding: according to official figures, Commercial sales measured by floor area fell 5.3% in the first half after plummeting 24.3% in 2022.

4. The restructuring plan, in danger

Evergrande presented a proposal in March to restructure almost US$20 billion of unpaid offshore debt, but has several times postponed the votes in which its creditors will decide on the matter, the last of them last week, citing an evolution in sales worse than expected and the consequent need for a “re-evaluation” of the plan.

The company hoped to have the support of its creditors before October 1 and finish the process by mid-December, but for the moment it has only achieved just over 30% of the votes for an important segment of debt (“class C” ) valued at about US$ 13,000 million, although it already has the green light for two other types.

5. Turbulence returns

The last few weeks have been especially turbulent for Evergrandewhich disclosed losses of more than 80 billion euros since 2021 and reactivated the listing of its shares in Hong Kong after a year and a half of suspension, falling 8.6% in the last month and almost 99% from its peak in October 2017 .

Beyond the alleged house arrest of its founder, the group has filed a bankruptcy request in the United States, has warned of the impossibility of issuing new debt securities due to the regulators’ investigation of its main subsidiary in China, has faced the arrest of employees of its wealth management subsidiary and today it again froze its shares.