Will the Evergrande Empire collapse in China? The largest real estate developer in the country, which has 200,000 employees, is riddled with a huge debt of 260 billion euros. This Tuesday, he admitted for the first time that he might not be able to repay all his creditors, and in particular all the small Chinese owners who had trusted him. A bankruptcy of the group would therefore have very strong consequences, at least in the country. To see more clearly, 20 Minutes has contacted several specialists in the subject and offers you a little recap ‘.
How did Evergrande build his fortune and why is it stuck now?
“Evergrande illustrates a model valid for the entire Chinese economy, namely growth through debt,” explains Jean-François Dufour, director of the consulting firm DCA Chine-Analyze. The private group got into the real estate sector and for a long time it managed to convince the banks to finance it permanently. As long as the dynamic was there, it worked ”.
The problem is that this model is very sensitive to economic downturns. The Covid-19 pandemic, and especially the new Chinese real estate situation, dealt an almost fatal blow to Evergrande. “At the start of the year, the government set much stricter debt rules,” recalls Mary-Françoise Renard, professor at the University of Clermont-Auvergne and an economist specializing in China. Evergrande did not meet the conditions, and was forced to sell off housing to be sure of having liquidity ”. But the central government also decided a few months ago that the group had to completely finish its homes before being able to sell them.
Evergrande can no longer count on new money from future owners to finance apartments already under construction. At the same time, he must pay for the construction sites to complete 1.4 million housing units, according to an AFP estimate. And the trap is closing. “Seeing that the debt was far too important, the rating agencies significantly downgraded its rating, which made it very difficult to convince banks to lend money” argues Mary-Françoise Renard.
What are the options now?
“If Evergrande goes bankrupt, there are two main risks in the country,” says Jean-François Dufour. First, the economic risk. Chinese banks would see that the state no longer wishes to intervene as a last resort and could decide to tighten access to credit, which would lead to a sharp slowdown in the economy. Then, the social risk: if tomorrow, people who have invested everything find themselves on the street, they might want to question the system ”. However, millions of Chinese owners have invested in the company.
For these reasons, the specialists interviewed believe that Beijing will not stand idly by. “China is likely to put Evergrande under state control, with the sale of assets and takeovers of real estate programs by other companies. On arrival, it is the Chinese banks which will bear the cost of this depreciation ”, estimates Jean-François Dufour.
Is there a risk for the global economy?
The rout of the Chinese real estate group could reveal some surprises. “It is possible that an American hedge fund has bought debt from Evergrande and must sell other positions to hedge, which could cause a domino effect,” says Alexandre Baradez, analyst at IG France, interviewed by the ‘AFP. For the analyst, the situation is reminiscent of the Archegos scandal at the end of March, in which a New York investment company made several banks lose billions of dollars by taking particularly risky positions.
“Even if we must remain cautious, I do not think that Evergrande’s problems will lead to systemic effects all over the world,” adds Jean-François Dufour. This will likely have an impact on foreign investors who bet on Evergrande, and who will never get their money back. They had a form of blind trust in the Chinese model ”.