Evergrande Debt Crisis Explained

The Evergrande debt crisis is the ongoing financial situation of Chinese property developer Evergrande Group. After a letter circulated online of the company informing the Guangdong government that it was at risk of a cash crunch, shares in the company plunged in value, with impacts on global markets and a significant slow-down in foreign investment in China during August and September of 2021.

Evergrande Debt Crisis Explained

Aggressive Expansion

Thousands of retail investors, as well as banks, suppliers, and foreign investors are owed money by the company. As of 21 September, the developer has 2 trillion RMB (310 billion USD) in liabilities.

Evergrande’s land reserves alone are large enough to house 10 million people. However, Evergrande had pursued an aggressive expansion over the last years, including ventures in electric vehicles, theme parks, energy, and many other sectors.

These leveraged investments included Ocean Flower Island, a 100 billion RMB (15.5 billion USD) project to build an artificial island in the South China Sea, plans to spend over 45 billion RMB (7 billion USD) between 2019 and 2021 in electric vehicle development, and ownership of Guangzhou F.C., China’s richest football club.

Wealth Management Products

On 21 September 2021, Financial Times reported that “Evergrande used retail financial investments to plug funding gaps”. In this scheme, the company raised billions of dollars through wealth management products (WMP), using that money to make up for lacks of funding in the company and re-pay other wealth product investors.

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The products were highly risky, with an anonymous executive suggesting they were “too risky for retail investors and should not have been offered to them”. However, they were marketed widely, with Evergrande managers pressuring subordinates to purchase products advertised at over 10% annual returns. In total, the remaining WMP liabilities stand at 40 billion RMB.

Referred to as a type of supply chain finance, investors would invest money in shell companies they falsely believed to exist to supplement their working capital. As sales in the products fell, the business model of the products became unsustainable.

An Evergrande executive is quoted as saying “Many people . . . might be arrested for financial fraud if investors don’t get paid off. Our products were not for everyone. But our grassroots salespeople didn’t consider this when making their sales pitches and they targeted everyone in order to meet their own sales targets.”

Other Chinese companies have also sold wealth management products, including Baoneng, Country Garden, Sunac, and Kaisa.

Three Red Lines

In an effort to rein in the highly indebted sector, the Chinese government enacted a “three red lines” rule to regulate the leverage taken on by property developers, limiting their borrowing based on their performance in debt-to-cash, debt-to-equity, and debt-to-assets metrics.

Evergrande is considered by analysts to be too big to fail and a Lehman Brothers–style collapse would have massive consequences on the Chinese economy and the world at large.

The new regulations greatly affected the property developer, which had historically leveraged itself heavily. So while the company’s stock price had outpaced the Hang Seng Index thirty-percent growth rate between its 2009 IPO and 2017, having multiplied eightfold, it had also become the world’s most indebted property group.

The Financial Times cited the director of S&P Global Ratings as stating that the developer was “so highly leveraged, it’s likely to breach all of the alleged thresholds”.

The company announced in March 2021 that it was looking to cut its debt load by 150 billion RMB (USD$23.3 billion ‘). Nonetheless, Evergrande was still expanding, having launched 63 new projects in the first half of 2021.

Other central and local government regulations, including mortgage lending limits, rent caps in big cities, and land auction cancellations, precipitated a slowdown in the property sector, as authorities attempt to control rising house prices.

The ‘Fabricated’ Letter

A letter circulated online on the last week of August 2021, where Evergrande informed the government of Guangdong province that they were close to running out of cash.

The company alleges the letter has been fabricated and is “pure defamation”, and followed its circulation by a number of public announcements to reduce fears from investors and the public.

The Default

In a statement on 31 August 2021, Evergrande warned it would default on its debts if it failed to raise enough cash to cover them. At the time, Evergrande was China’s most indebted real estate developer.

On 24 September, Evergrande missed off-shore bond payments totalling 83.5 million USD. While the company has 30 days to avoid defaulting on the debt, analysts feel it is unlikely to manage doing so.

Assets Sale

In order to raise capital, the group has started to sell off some of its assets. On 29 September 2021, the company sold a 20% stake in Shengjing Bank, retaining 15%, raising 10 billion RMB (1.5 billion USD).

On October 4, 2021, the Cailian Press reported that rival Hopson Development was set to buy a 51% stake in the Evergrande Property Services subsidiary for around US$5 billion.

Corporate Bonds Exposure

American and European companies had significant exposure to Evergrande through their holding of corporate bonds. Ashmore Group, an emerging market specialist, owned more than $400 million at the end of June while UBS itself owned over $300 million.

Other companies such as BlackRock held much less, with the world’s largest asset manager holding just over $18 million, and HSBC having a peak exposure of $31 million.

On 28 September 2021, Sunac bought back $34 million of its bonds and denied requesting government assistance. A letter, which the developer claimed was merely a draft, surfaced online arguing that recent regulations in Shaoxing intended to control property prices had left a local project unable to break even.

On 5 October 2021, developer Fantasia Holdings missed a payment on a USD$206 million bond that had matured the day before, triggering a default. Just weeks prior, the developer had assured investors it had “no liquidity issue”.

Potential Restructuring

On 22 September 2021, the governments in Zhuhai and Nanshan District, Shenzhen took control of sales revenue for Evergrande’s properties in a state-controlled custodial account to protect home-buyers and continue construction of the company’s developments.

Various provinces have been doing so since August as the developer has put hundreds of these projects on hold.

Off-shore bondholders hired Kirkland & Ellis and Moelis & Company to advise them ahead of a potential restructuring, according to the Financial Times.

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3 COMMENTS

  1. Rothschild bank:
    Beijing – JPMorgan Chase Bank (China) Company Limited (J.P. Morgan) announced that it had received approval and license from the National Association of Financial Market Institutional Investors (NAFMII) to underwrite corporate bonds in China’s interbank bond market.

    J.P. Morgan is the first American bank to receive this license. NAFMII is an authorized self-regulatory body accountable to People’s Bank of China that oversees the Chinese interbank bond market. The license enables J.P. Morgan to underwrite debt financing instruments issued by non-financial entities, including commercial papers, medium-term notes and other instruments approved by regulators.

    “China is a critical market for J.P. Morgan both regionally and globally and the firm believes in its long term future success. As its capital markets continue to develop with increasing international participation and transparency, the license will further enhance our ability to serve our clients,” said David Li, Chairman and CEO of J.P. Morgan China.

    J.P. Morgan has been doing business in China since 1921. J.P. Morgan’s services include corporate and investment banking, commercial banking, treasury services, markets, investor services and asset management. Today, the firm serves Chinese and international corporations, financial institutions and government agencies through our network in Beijing, Shanghai, Tianjin, Guangzhou, Chengdu, Harbin, Suzhou, Shenzhen and Zhongshan

    Rothschild investment in china: lynn rothschild talk china university:

    China / rothschild interview at chinese college

    . You have invested in very diverse sectors, including weather forecasting…

    A. For CCTV (China Central Television, the national television broadcaster in China) in fact. We are the software provider for CCTV weather…

    Q. So you’ve invested in diverse sectors such as agriculture (via FieldFresh Foods in India), media (The Economist Group, UK), weather forecasting (via Weather Central), as well as luxury and real estate. How do they all fit in?

    . How do you really split your investments between emerging economies and the developed world?

    A. Well, just to make your list more complicated than it already was, we are actually for the first time taking a very serious look at Africa. We were in India early. We should have been in China early. My husband with Rothschild Bank was here very early. He came after the Cultural Revolution ended, and he was the first major bank to come to see the government in the 1970s. We at E.L. Rothschild, missed a few boats, regrettably in China. We invested in India pretty early, and we are looking at infrastructure in Africa right now to add to your list. Where we find the management team, we’ll make the investment.

    Q. It’s good that you mention China, because I remember you went to India and also to China and then choose India instead. Is that changing now? Are you looking for opportunities here?

    A. We are looking for opportunities. We were here at the right time. My thinking was that back in 2004, $49 billion of foreign direct investment (FDI) had come into China, and in the same year $4.9 billion had gone into India. So my thinking was that, the delta couldn’t be that much that. We had a better opportunity to get in more on the ground floor. I was wrong, but I’ve been wrong before.

    https: //english. ckgsb .edu. cn/knowledges/el-

    *****Russia kicks Rothschild bankers out
    Russia in 2000, Russia was bankrupt.

    The nation owed $16.6 billion to the Rothschild-run International Monetary Fund while its foreign debt to the Rothschild-controlled Paris & London Club Of Creditors was over 36 billion dollars.

    But Putin took advantage of the current boom in world oil prices by redirecting a portion of the profits of Russia’s largest oil producer Gazprom so as to pay off the country’s debt. The continual surge in oil prices greatly accelerated Russia’s capacity to restore financial sovereignty.

    By 2006 Putin had paid off Russia’s debt to the Rothschilds. Russia’s financial dependence on the Jewish financiers was now over. Putin could then establish what became his Russian Unity Party’s 2007 campaign slogan: Putin’s Plan Means Victory For Russia!

    ****philosophy
    That is how Karl Marx (1818–83) saw it, and Ludwig von Mises (1881–1973) judged similarly. Mises wrote:

    The history of the West, from the age of the Greek Polis down to the present-day resistance to socialism, is essentially the history of the fight for liberty against the encroachments of the officeholders.

    But unlike Marx, Mises recognized that human history does not follow predetermined laws of societal development but ultimately depends on ideas that drive human action.

    From Mises’s point of view, human history can be understood as a battle of good ideas against bad ideas.

    Ideas are good if the actions they recommend bring results that are beneficial for everyone and lead the actors to their desired goals;

    At the same time, good ideas are ethically justifiable, they apply to everyone, anytime and anywhere, and ensure that people who act upon them can survive.

    On the other hand, bad ideas lead to actions that do not benefit everyone, that do not cause all actors to achieve their goals and/or are unethical.

    Good ideas are, for example, people accepting “mine and yours”; or entering into exchange relationships with one another voluntarily. Bad ideas are coercion, deception, embezzlement, theft.

    Evil ideas are very bad ideas, ideas through which whoever puts them into practice is consciously harming others. Evil ideas are, for example, physical attacks, murder, tyranny.

    Russia learned its lesson…..china slow learning.

    This world ecconomic collapses all by design to bring in one ring control of EVERYTHING…..which it can not support in current system….still a BAD idea.

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