Behind the Evergrande Debt Debacle

Xu Jiayin, billionaire chairman of the embattled Evergrande, inspecting an early model of the firm’s electric vehicle enterprise established last year. (Image, JSTV)

Past weeks have seen an onslaught of headlines surrounding the ordeal now faced by China Evergrande Group, once the world’s leading real estate-owning company by total assets, as it grapples with a lack of funds to service its growing debt and deteriorating public confidence.

The firm’s performance at the Hong Kong Stock Exchange has weakened consistently since its peak in 2017 at over HK$31 ($4) per share. Today’s session has seen Evergrande stocks tumble a further 9.15% on the day to reach HK$5.26 at the end of trading.

Given the enormous scale of the company’s property development portfolio – one analyst commented last year that it “could accommodate the entire population of Portugal” – the potential ramifications of Evergrande undergoing a credit default are extensive. As the company looks to offload various business ventures and shore up its financing, banks and regulators have been making moves to protect their investments and maintain stability in the country’s economy.

The Rise of China Evergrande Group

Despite holding a relatively low profile on the international stage, Evergrande has soared since its inception to become one of the most sprawling property development companies in the world. Founded in 1996 by Xu Jiayin (许家印, often referred to in Cantonese as ‘Hui Ka Yan’), the company in its early days set out building a real estate empire in the southern metropolis of Guangzhou.

In the following years, the firm gradually expanded its operations across dozens of Chinese cities and completed thousands of large-scale development projects. In 2009, Evergrande successfully listed on the Hong Kong Stock Exchange, a transaction that brought in $722 million for the company.

With the groundswell of new funds provided by its Hong Kong IPO, Chairman Xu has since sought to diversify Evergrande’s business operations. To date, the firm has carried out ventures across a wide range of new fields, including health services, insurance, agriculture and bottled mineral water.

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The company has been the majority stakeholder in the Guangzhou Evergrande Football Club since 2010, for which it is currently constructing a new $1.7 billion stadium, touted as the biggest in the world upon completion.

Evergrande has also made incursions into the increasingly competitive field of electric cars, serving as a key early investor in Faraday Future, a Los Angeles-based EV startup founded in 2014 by Chinese businessman Jia Yueting. The collaboration, which saw Evergrande transfer $854 million to Faraday in 2018, eventually spiraled into controversy as Jia attempted to call off the investment and eventually took legal action against Evergrande.

Moreover, the now Shenzhen-based Evergrande established its own EV firm called Hengchi in 2020, unveiling nine preliminary models at Shanghai’s auto show earlier this year, with deliveries expected to begin in 2022.

Recent Woes

Evergrande has benefited enormously from serendipitous timing, as its early development has coincided with a boom period of sustained urbanization and rapid construction across China.

The past year, however, has been anything but smooth sailing.

More stringent credit standards in the country have encouraged Evergrande to sell projects prior to their completion in order to maintain cashflows, while banks have increasingly questioned the firm’s business practices and become more hesitant to lend to Evergrande.

Adding further hurdles, local market regulators have sought to clamp down on the presales, calling a halt to some of Evergrande’s key projects.

These forces have combined to deliver a significant blow to Evergrande’s reputation and market valuation. Once the richest person in China, Chairman Xu has seen his personal wealth fall 72% since reaching $34 billion in July of last year, and the company’s share price in the Hong Kong Stock Exchange has plummeted.

In a further sign of the times, Evergrande has seen its credit rating lowered by a host of leading agencies, including the S&P, which on Monday downgraded the company by two positions, from B+ to B-.

Some cases have seen homeowners calling foul on the company for repeated delays to building projects and falling property values. According to reporting from the Financial Times, one disgruntled buyer in Chengdu claimed he had paid over one million yuan for an apartment that Evergrande is now not likely to complete until next summer.

Given the scale of Evergrande’s activities across China, fears of systemic risk to the country’s economy are rising. If current trends continue, it is likely that more substantial public financial support will be necessary to rescue the firm and stop the contagion from causing further repercussions in the wider economy.