There is not much time left: the heavily indebted Chinese real estate company Evergrande has to raise $ 83.5 million by Saturday in order to finally pay the interest on a bond. Actually, Evergrande should have transferred the amount due on September 23, but according to the associated contracts, formal insolvency only occurs after a period of 30 days, which now ends on Saturday, then Evergrande, the second largest real estate developer in the People’s Republic, would be , officially broke.
Behind the company empire is the billionaire Xu Jiayin, who usually calls himself Hui Ka Ya. After his career in a state-owned steelworks, he founded the company in 1996 and benefited not only from excellent relations with the Communist Party, but also from the building boom in China. In 2017 he was published by the business magazine Forbes named the richest man in Asia. But then over the past few months, Chinese regulators enacted hundreds of new rules and restricted borrowing to cool the housing market. Not only did prices come under pressure, so did real estate companies; Loan defaults and bankruptcies followed. Now Evergrande is sitting on about $ 300 billion in debt. By comparison, $ 83.5 million in interest rates sound tiny, and Evergrande actually had a plan for averting default. The company’s own real estate management company Evergrande Property Service was to be partially sold for 2.6 billion dollars.
As a result, Evergande’s shares in Hong Kong had been suspended from trading since October 4th. On Wednesday, however, Evergrande announced that the partial sale of the service division to the Hooplife Technology Group, a subsidiary of the investment holding Hopson Development, had failed. Based on information from various sources, there are reasons to believe that the buyer did not meet the requirements for submitting a general offer for shares in Evergrande Property Services, according to Evergrande’s announcement. Hopson originally wanted to acquire 51 percent of Evergrande’s facility management business. The total value was estimated at more than 40 billion Hong Kong dollars, the equivalent of 4.4 billion euros.
The price of Evergrande shares collapses
Evergrande papers have been trading in Hong Kong again since Thursday and the price promptly collapsed by 12.5 percent. Many investors are worried about the collapse, some experts even warn of a “risk of contagion” for the entire Chinese economy, since Evergrande’s debt is so high. The Chinese authorities meanwhile emphasize that the risks in the real estate sector are manageable, for example the central bank last week. On Monday, the Beijing Statistics Bureau assured that everything was fine. And now even the Deputy Prime Minister Liu He, who is responsible for economic issues, reports that everything is going well. The message to the Chinese: don’t worry.
In 1995 real estate investments accounted for around five percent of the gross domestic product. In 2019 it was thirteen percent, and the Chinese economic power has doubled several times since the mid-1990s, writes the American economist Kenneth Rogoff in a study. “In an international comparison, the extent of the Chinese real estate boom is certainly unprecedented.” If you also take into account the activities of construction companies, steel and cement works and the associated service companies, Rogoff estimates that the real estate sector is responsible for 29 percent of Chinese economic output – significantly more than in many other countries. A collapse in the real estate market, triggered by panic selling after an Evergrande bankruptcy, could therefore have devastating effects: Around 60 percent of Chinese assets are invested in concrete, in the United States it is just a quarter.
So how will it go on? A smashing of Evergrande is conceivable. Anyone who has subscribed to a bond will very likely go away empty-handed. In China itself, regional governments and authorities could then manage and complete individual residential complexes to prevent Chinese property owners from having to write off their assets. Because the group is currently working on a good 1,000 new construction projects in the country. And Evergrande has asked for prepayment for around 1.4 million apartments, most of which do not even exist yet.