Evergrande Real Estate is one of the world’s largest property development companies. Situated in Beijing, Evergrande is the largest player within China’s real estate sector, a market that accounts for more than 30% of the country’s GDP. Evergrande currently owns more than 1,300 projects across 280 different Chinese cities. Despite prioritizing real estate, they have also diversified into different market segments such as wealth management, electric vehicle manufacture, and food and drink manufacturing. They are also famously known for owning one of the biggest football teams in China – Guangzhou FC. But why has the world suddenly shifted its focus on an organization that prior to recent months seemed unknown to most?
Over the last years, China has experienced a housing boom like no other, with its real estate market once called “the most important sector in the world economy.” Being valued at about $55 trillion, it is twice the size of the USA’s real estate market and four times larger than China’s GDP. In most developed nations, housing ranks about 10-20% of a country’s GDP, whereas in China it accounts for 29%. Even though China is infamous for having overdevelopment, with certain cities classified as “ghost towns” where either the population does not match the number of complexes built, or the buildings are much too expensive, the market continued to explode.
Despite its success in China, it seems that the housing sector might start depleting. As of now, the demographics in China show a low fertility rate of 1.3%, also implying that the working and home-buying age groups are declining. It is likely that in the next 20 years, there will be a 25% fall in homebuying as the prime age of buyers is between 25-39 years old. China focused on doubling its urbanization to 64% between 1996 and 2020 but is likely to slow down. Additionally, China is experiencing fewer marriages, which leads to fewer children and less need for households.
For every sector, there is always a leading frontman, and for China’s real estate that is Evergrande. For Evergrande to become as large and successful as it has today, it expanded aggressively by borrowing over $300 billion in addition to the $90 billion they already had in debt. During the pandemic, Evergrande would give buyers massive discounts for homes and sell in bulk to increase its cash flow. They even unveiled plans to build an automobile marketplace, theme parks, and water businesses to further increase capital. The issues, however, arose when the Chinese government shifted its focus from paying off debt to reaching stability.
The Chinese government has instituted a new decision to reduce the amount of debt that companies can take on—predominantly placed in effect due to the Covid-19 pandemic. This sudden shift in government policy has caused Evergrande to come under a lot of pressure to repay its debt. This pressure has led to the suspension of construction, buildings, and delayed payments to their suppliers. The biggest red flag was the moment Evergrande announced that it cannot pay off its debts yet and had been put on an economic freeze. The business sector is not the only part that has been influenced by this sudden change in Evergrande. Ordinary citizens have been storming to the Evergrande headquarters to protest as they expect that their investments will not be seeing the light of day. Evergrande has stated that repayment will be guaranteed but will take two years. One protestor, who had already invested 100,000 yuan or $15,497 American dollars, expressed their displeasure and fear that the company would be bankrupt by the end of the year. He also explained that some relatives and individuals have even invested around or over 1 million yuan into the company.
Of course, it is only natural that Evergrande’s business partners are more than displeased with what has happened to the company. However, so are the people of China, especially those who have paid for houses that have yet to be built. This rather large group of individuals is facing the brunt of the problem. Due to Evergrande’s business model, in which they raise money by selling housing to individuals before starting to build these houses. Now, Evergrande cannot pay their employees, investors want their money back, and suppliers want their paychecks. But the international concern is much more profound than just a few houses that need to be built.
The fear behind Evergrande’s fall from grace only requires one to look back about fourteen years to the 2007 housing crash. Dread about the similarities between Evergrande and Lehman Brothers has started to circulate as both organizations seem to be reflecting one another. In 2006, Lehman Brothers were known as one of the largest mortgage and housing companies in the United States. They held over $600 billion in diversified assets throughout the globe. But the foundations of Lehman Brothers started to falter in 2007-2008 as the firm tried to fight off losses through selling assets, reducing costs, etc., yet was unable to stay afloat and eventually declared bankruptcy. Despite efforts to liquidate Lehman Brothers or get a government bailout, the company was allowed to fail, which plummeted the world into a global downturn that many know now as the 2007 Great Recession.
Efforts to keep Lehman Brothers afloat were prominent as both the United States government and many other investment organizations tried to help the company. However, it seems that the Chinese government is not as concerned with Evergrande’s financial problems and has not stepped in. In fact, it almost seems that China is ready for Evergrande to fail. However, with increasing pressure from both internal and external shareholders, the Chinese government did seem to inject an additional 100 billion yuan into the organization to keep its liquidity going.
So far, Evergrande has already caused the S&P 500 to fall 5.2% between September 2-20th. The conglomerate itself has faced a share crash of nearly 85%. Of course, there are other external factors that are affecting the malleable stock market, but when Evergrande holds such an influential grasp on the world’s second-leading economy, economists and investors can only speculate to a certain extent.
Over the last weeks, China’s national stock market and the international stock market have been closely monitoring Evergrande’s situation. International law firms such as King & Wood Mallesons have been recalled to investigate and examine Evergrande’s finances. But it seems that Evergrande is the first domino of many as other housing and developer companies are being investigated in China. For example, Fantasia Holdings focuses on luxury apartments and is based in Shenzhen. The company has not been able to pay off a $315 million loan at the beginning of September. Similarly, Chinese Properties Group’s subsidiary Cheergain Group has had to default $266 million. Modern Land—another real estate company located in Beijing—has also missed their debt payments on a $250 million bond that was due October 25th. Maybe Evergrande is simply the beginning of a much larger problem, and their collapse could signal a dark future for the Chinese economy.
It has been difficult to fully analyze Evergrande’s and China’s economic situation as the country remains to be very conservative on what information it divulges to the public. Goldman Sachs analysts have even commented on the complexity of understanding Evergrande’s recovery given the disquieting absence of records detailing assets and liabilities. Evergrande’s future seems uncertain even with the interventions the organization is putting in place to remain afloat. The Chinese media is already painting that Evergrande is too late to be saved and that it is a “huge black hole.” But when an organization as integral as Evergrande hints at the possibility of drowning, it naturally sends ripples through the market. This media has now entered international waters as many other countries are concerned about whether this fall in the market will lead to worldwide consequences. One can only hope that these ripples do not turn into the shockwaves that the 2007-2008 market crash caused.
