Cover Story: Evergrande Debt Crisis

and I'm Tim Stunnobek the international cover this week. China, Evergrand grew until recently, the world's largest property developer, is buckling under three billion dollars in liabilities, and financial markets are bracing for potential aftershocks. Evergrand's troubles are partly a familiar tale, but its situation also reflects deliberate policy choices made by the ruling Communist Party under President Ji Jimping.

Like the tech giants Ali Baba in ten Cent, which were the targets of sudden regulatory crackdowns this summer, Evergrand managed to find itself in the way of the party's priorities. Too Big may still fail as developer Evergrand faces a debt crunch, China tries to depend less on real Estate by Bloomberg News. Sunny Peninsula, a seaside development in the southern Chinese city of Guangzhou, was supposed to house five thousand families in dozens of towers spread across an area

the size of thirty soccer fields. Many of the buyers were white collar workers, benefiting from the fastest urbanization in human history, but the project now looks more like the set of a disaster movie. Half finished apartment blocks stand empty and abandoned, untouched for months in the humid summer weather. Piles of rebar and steel beams are accumulating coatings of rust.

China Evergrand Group, until recently, the world's largest property developer, owns dozens of stalled sites like Sunny Peninsula across China. Buckling under more than three hundred billion dollars in liabilities, the company is close to collapse, leaving one point five million buyers waiting for finished homes. The global financial markets are bracing for potential aftershocks. Evergrand is China's largest issuer of high yield dollar denominated bonds and bills, are coming

due to an array of banks and suppliers. Given its footprint in the housing market, there's also a risk of a disorderly collapse triggering a broader decline in property prices, bad news in an economy where twenty seven percent of loans are for real estate. The stress isn't only being felt in bankers offices. Earlier this month, HomeBuyer surrounded a government office in guang Zou to demand construction be restarted on their apartments, and unconfirmed videos circulating on social media

depict similar protests in other cities. Furious retail investors who helped fund Evergrand's expansion have turned up at the company's Shunjun headquarters to complain about delayed repayments on wealth management products it's sold. Evergrand's troubles are partly a familiar tale of an overextended, systemically important company taxing its creditor's patients.

That alone would make it a test for Chinese authorities, but its situation also reflects deliberate policy choices made by the ruling Communist Party under President Shi Xin Ping, like the tech giants Ali Baba Group and ten Scent Holdings, which were the targets of sudden regulatory crackdowns that wiped out tens of billions of dollars in market value. This summer, evergrand found itself in the way of the party's priorities.

For several years, officials have been taking steps to cool real estate prices, which they see as a potential source of risk, and signaling that they expect both house price growth and new construction to remain roughly flat. In the central government, the view has shifted over how much China's economy can depend on the housing market, says Ju Ning,

a former adviser to China's Central Bank. Instead, Beijing wants to steer China's economic resources toward areas it views as more central to national security, above all, high tech manufacturing that can help it reduce its reliance on the U S and its allies. The party is so emphasizing financial

and social stability over sheer growth. Leaders speak of the goals of moderate prosperity and common prosperity, and households accumulating more debt to buy multiple or more luxurious homes doesn't necessarily fit with that vision, nor does the wealth inequality that property booms can create. She's pledges to cut pollution and carbon emissions also require curbing construction. China may be willing to let Evergrand fail if it thinks it can

engineer a soft landing for the real estate sector. The fifty six trillion dollar domestic financial system is dominated by state owned lenders, which give the government extensive power both to squeeze borrowers and to manage the impact of defaults, but the stakes are enormous when industries such as construction

and property services are included. Real estate accounts for at least fifteen percent of the nation's gross domestic product, and more than seventy percent of urban China's wealth is stored in housing. Countries such as Australia, Brazil and Zambia depend on China's relentless demand for steel, copper, and other construction materials, and US and European companies increasingly looked to its consumer

market for growth. In When China created a nationwide housing market after tightly restricting private sales for decades, only a third of its people lived in towns and cities. Now almost two thirds do, increasing the urban population by four

hundred and eighty million. The homes they've moved into are modestly sized by developed world standards, averaging less than forty square meters or about four hundred and thirty one square feet per person, but about nine of urban residents owned those homes, worth more than fifty trillion dollars in total. According to Goldman Sachs, this is the wave ever Grand Road. Its founder and chairman, Hui Kayan, was born into grinding poverty in the central province of Henan in eight In school,

all I eight was sweet potato and steamed bread. He said in a rare speech in twenty eighteen, I really hoped I could leave the village. He found his ticket out by becoming one of a tiny number of rural students to pass the university entrance exam, going on to study metallurgy. In nineteen ninety two, we came to Shunjin, then a small town on the border with Hong Kong. After working as an importer or exporter, he dove into the property market, founding Evergrand in ninety seven. By twenty sixteen,

it was China's biggest property developer by sales. Everything for me and Evergrand is given by the Party, the state, and society, he said in his twenty eighteen speech, even making allowances for flattery, who wasn't wrong. The forces that allowed Evergrand to grow so rapidly emanated in large part from Beijing. When the two thousand eight and nine global financial crisis cut demand for Chinese exports, the central government responded with a massive stimulus package that made borrowing easy.

Land prices ord in both coastal megacities and previously sleepy regional centers, and developing housing became a near certain bet. The key to success was scale, achieved by borrowing with land as collateral. The bigger a developer became, the more it could borrow and at lower interest rates, a cycle that could continue as long as property prices kept rising. Supercharged by real estate profits, Evergrand expanded its reach into

China's burgeoning consumer economy. Some ventures, such as theme parks, had at least a faint connection to property development. Others, including mineral water and a quixotic attempt to build a world class soccer club in Guangzhou, had none at all. It didn't take long for analysts, particularly outside the country, to predict that Chinese developers in general and Evergrand in particular,

were building up far too much debt. As early as twelve, some argued that Hui's company would soon buckle under the weight of its leverage. But the day of reckoning never seemed to arrive. The increasings of as tocation and profitability of Chinese companies meant more of their workers could afford new homes. Ever, grant even weather to steep drop in

home sales. In twenty when a glut of unwanted apartments drove average prices down by as much as six percent year on year, Whi became China's second richest man, behind only Ali Baba's Jack Ma. This resilience was partly a function of government policy, including a renewal of stimulus measures that helped prices recover, but policymakers in Beijing were haunted by the fragilities the slump exposed. At the end of twenty sixteen, the ruling parties Politbureau unveiled a new slogan,

houses are for living in, not for speculation. One policymaker complained the following year that the economy was being kidnapped by the housing sector. Beijing began instituting a series of curbs on what's known as shadow financing, lending by entities other than banks or through practices such as selling wealth management products. Among other things, it prevented companies from raising

money by offering guaranteed returns to investors. There were also efforts by provincial and city governments to damp real estate speculation on Hainan, An Island in the South China Sea, touted by developers as China's answer to Hawaii. Non locals were effectively blocked from buying homes before spending two years in the province, and all buyers were barred from reselling

a residence within five years of purchasing it. Suddenly, Evergrands sprawling property empire seemed out of step with the times, and not only because of its high debtload. The government wanted affordable housing for young people. At the time, Evergrands marquee project was Ocean Flower Island, an extravagant plan to build a Dubai style artificial archipelago on the Hainan coast, with one of its fifty eight hotels designed to look like a European castle and another offering seven star luxury.

We began a campaign to change Evergrand's image. The company plowed billions of you on into building houses in poorer rural areas, and in twenty nine been announced that it intended to become the world's largest manufacturer of electric vehicles. Sunny Peninsula was a product of Hui's shift. Rather than luxury condominiums for investors, it promised relatively affordable apartments for

manufacturing workers. The acute phase of Evergrand's crisis began in twenty It could have been a relatively good year for the company, thanks to China's successful containment of the coronavirus. The economy contracted for only a single quarter, while looser monetary policy boosted the housing market. But for reasons that aren't entirely clear, Evergrand began struggling to cover its debts.

It appealed to local government officials for help in averting a cash crunch as investors lost confidence, its biggest bank creditors started to slow its lending. It didn't help that Hui's knew ventures like the e V operation were sucking up much of its cash. Eventually, strategic investors, some of whom were also suppliers, agreed to waive their teen billion dollars the company owed them as part of a debt

for equity swamp. It ended with its profits down by half. Then, authorities, convinced by the pandemic that risk prevention was more important than ever, ordered Evergrand and other top property developers to cut their debt. Guo shu Ching, China's top central bank official, in November, called real estate the biggest gray rhino for China's financial stability, referring to a large yet overlooked threat. Relations with the US also plunged to a new low.

Fearful of being cut off from supplies of products such as microchips, the government declared improved scientific research and greater technological self sufficiency its top economic goals. Housing construction would be no help there. In March, Beijing signaled it might revive efforts to introduce a national property tax system, which would reduce local administration's reliance on land sales for income.

The central and local governments also released some four hundred separate regulations on home buying, including rules preventing people from divorcing just to get around one house per family limits, and directed banks to slash mortgage lending and channel money to manufacturers instead outstanding mortgages as a share of GDP dropped for the first time in a decade. The results have been dramatic in the booming coastal cities that previously

powered China's property market. A broker in Shunjan, who asked to be identified only by his surname Lee, says that inquiries from prospective buyers are down a third from a year ago. The transaction volume looks pretty ugly, and the only home sold were either due to the sellers urgently needing cash or worries that prices will drop further. He says.

The sales decline hit Evergrand harder than any other large developer, and it spent much of this year seeking to raise cash by any means possible, including trying to sell its headquarters building in Hong Kong to avoid admitting to buyers that the company couldn't deliver their apartments, who said he'd issued a military order for projects to become pleaded as planned, His efforts fell short. This month, Chinese authorities told major lenders to Evergrand not to expect interest payments due on

some bank loans in past Chinese housing slumps. This might be the moment when Beijing would step in to put a floor under the market, encouraging banks to lend to push up prices and boost revenue for property developers, but for now, policymakers seem willing to inflict economic pain to alter expectations that real estate prices will always rise. Many

homeowners have gotten used to policymakers protecting their investments. If prices fall, that means the economy is in a downturn, and that will put huge pressure on the local government, says Jenny Wou, a financial worker in Shunjin who bought an apartment last year. So it's impossible that home prices would drop in Tier one cities. Tier one is shorthand for the mega cities of Beijing, Guangzhou, Shanghai and Shanjin.

Evergrand could avoid bankruptcy. Most analysts expect to restructure ring, in which some banks roll over financing while other creditors receive assets such as properties and land rather than cash as repayment, and bondholders get some but not all, of their investment back. The company's humbling may nonetheless mark a turning point in China's economy. Developers will still be needed.

The government plans for ten million people to move to urban areas every year through but the companies are likely to be smaller and they won't benefit as much from runaway price rises. Those who put their savings into Evergrand projects such as Sonny Peninsula are hoping their own slice of moderate prosperity has a place in Beijing's vision of a tamed property market. Last month, a group of angry

buyers gathered at the site. We don't care about price cuts, said one, who asked to be identified by his surname Chung. Our one and only demand is that Evergrand can deliver the project, and that's this week's cover story. Find more in the current issue of Bloomberg Business Week magazine. It's on newsstands, online at Bloomberg dot com, business week Com, and on the Bloomberg terminal, and be sure to to

listen to our Bloomberg Business Week Radio show. It airs live Monday through Friday at two pm Wall Street Time on Bloomberg Radio. Watches two in our daily broadcast. On YouTube, just search Bloomberg Global News, and you can also see me at Bloomberg Quicktake available at Bloomberg dot com, slash qt and streaming platforms like Roku, Apple TV, Samsung TV, and more. I'm Tim Stanabeck, I'm Carol Masser. This is Bloomberg