China’s Evergrande Group, previously the second-largest property developer in the country, declared bankruptcy in New York on Thursday.
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The company faced significant financial troubles and defaulted on its debt in 2021. This triggered a major property crisis in China’s economy, the effects of which persist today.
Evergrande sought Chapter 15 bankruptcy protection, allowing a US bankruptcy court to intervene in international insolvency cases. This provision facilitates collaboration between US courts, debtors, and foreign courts during cross-border bankruptcy cases.
Effects of Evergrande’s Bankruptcy
China’s real estate sector used to be really important for the country’s economy. It made up around 30% of the country’s total economic output. But when Evergrande couldn’t pay its debts in 2021, it caused big problems for China’s property markets. This hurt not only people who own homes but also the wider financial system in the country.
Evergrande got into trouble when Beijing started to control how much money property developers could borrow. This was done to stop house prices from going up too much.
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Since Evergrande fell apart, other big property developers in China like Kasia, Fantasia, and Shimao Group also couldn’t pay back what they owed. Just recently, another huge Chinese real estate company, Country Garden, said it might need to make changes to how it deals with its debts. This has led people to think that the company might need to reorganize its debts because it’s struggling to get enough money.
The problems in the real estate industry have become worse because China’s economy in general is slowing down.
A Potential Comeback Strategy?
Evergrande is a huge company that has more than 1,300 real estate projects in over 280 cities, as stated on its website. The company also does other types of businesses, like electric vehicles, healthcare, and theme parks.
Evergrande has had trouble paying back its loans since it officially couldn’t pay its debt in late 2021. The company’s debt reached 2.437 trillion yuan ($340 billion) by the end of last year. This is about 2% of China’s gross domestic product.
In a stock market report last month, Evergrande also said it lost $81 billion of the money its shareholders invested in 2021 and 2022.
Earlier this year, the company shared its plan to fix its debt problem. This was the biggest plan of its kind in China. Evergrande said it had made “binding agreements” with the people it owes money to in other countries about the main parts of the plan.
“The proposed restructuring will alleviate the company’s pressure of offshore indebtedness and facilitate the company’s efforts to resume operations and resolve issues on shore,” Evergrande said in a filing announcing the plan.
In this plan, Evergrande said it would try to go back to normal over the next three years. But it needed more money, around $36.4 billion to $43.7 billion. The company also said its electric vehicle business might have to stop if it doesn’t get new money.
Since then, some money has come in. Just recently, a car company in Dubai called NWTN said it would invest $500 million in Evergrande’s electric vehicle business. In return, NWTN will own about 28% of that business.