Titanic Chinese property developer Evergrande filed for bankruptcy protection in the United States on Thursday, the culmination of two years of distress as China’s troubled property market slides further into crisis.
Evergrande was once China’s largest property developer and its rise was a symbol of how important the indebted real estate sector had become to China’s economy. Some estimates say the sector accounts for 30 percent of China’s gross domestic product.
Real estate investment and home ownership became an important focus for precautionary savings in China, a place to stash excess income in a country seen by its own populace as having few safe outlets for investment. Owning real estate also plays an important role in China’s cultural as a status symbol, making the collapse of Evergrande even more important.
Evergrande filed for Chapter 15 bankruptcy in Manhattan. Chapter 15 makes bankruptcy protection under U.S. law available to foreign companies. Much of Evergrande’s corporate debt was held by U.S. and European institutional investors.
Evergrande has been under intense pressure since 2021, when it first defaulted on its bonds.
Breitbart News’ John Hayward described the meltdown at the company in October 2021:
Evergrande is a property development conglomerate based in the city of Shenzhen, founded in 1996 by Hui Ka Yan, who went on to become the richest man in China for a time. The company accumulated thousands of properties across China, amassing billions of dollars in assets — and, more importantly, over $300 billion in debt it cannot repay, about $20 billion of it owed to foreign creditors.
In short, Evergrande expanded too much, diversified too much, and borrowed far too much money from lenders who were happy to give the huge and ambitious firm an unlimited line of credit. Most of its big acquisitions were in residential real estate, and when the bottom suddenly fell out of China’s residential market, the rug was pulled from beneath the feet of its real-estate titan.
The supply of urban residential real estate far outstripped demand, and when demand stumbled, Evergrande’s creditors discovered the company could not make its loan payments – and its customers found themselves staring at half-finished buildings they might never be able to live in, despite making sizable deposits on attractive pre-construction deals.
Evergrande’s epitaph is written on empty apartment buildings, abandoned theme parks, and veritable ghost cities. The company’s business model assumed an endless stream of rural Chinese would move to the big cities and hunt for apartments. Vast sums were borrowed to build housing units in advance, but the customers stopped coming – and to China’s growing concern, the next generation of workers and home buyers isn’t getting born.
On Thursday, newswire AFP reported:
The latest court documents referenced restructuring proceedings in Hong Kong.
Yan Yuejin, research director at E-house China R&D Institute, told AFP that Evergrande’s latest filing was an “equivalent to seeking a better debt restructuring”.
“In fact, Evergrande’s business is certainly still operational. After all, it has a huge responsibility of ensuring deliveries of presold homes,” he told AFP.
In July, Evergrande reported a net loss of more than $113 billion in 2021 and 2022.
The group’s liabilities stood at almost $340 billion at the end of 2022, with $85 billion of borrowings. The developer had about $2 billion in total cash at the time.
Housing reform in China during the late 1990s unleashed a boom in the real estate sector, spurred by social norms that consider owning property a prerequisite for marriage.
But the massive debt accrued by the industry’s biggest players has been perceived by Beijing in recent years as an unacceptable risk for China’s financial system and overall economic health.
To reduce the sector’s indebtedness, authorities have gradually tightened conditions for developers’ access to credit since 2020, drying up sources of financing for firms already in debt.
A wave of defaults followed — notably that of Evergrande — which undermined the confidence of potential buyers and reverberated through the industry.
Fellow Chinese property giant Country Garden now risks defaulting on its bond payments next month, after the company said there were “major uncertainties in the redemption of corporate bonds”.
Beijing has recently sought to bolster the sector by cutting mortgage rates, slashing red tape and offering more loans to developers.
Worries about China’s deteriorating economy have been reverberating around the globe, sending stocks in the U.S. lower and bond yields higher. China announced this week that it would stop disclosing the unemployment rate for its younger workers after joblessness in the cohort skyrocketed above 20 percent. Official data this week showed growth in consumer spending, industrial output, and investment declining in China. Many western banks have slashed their estimates for GDP growth this year to below four percent.