Is the race to write off Evergrande’s debt possible?

Update published on November 22, 2021

There is a clearance sale in China. Evergrande, the world’s most indebted developer, is doing everything to improve its liquidity and support its day-to-day operations, but how long can that last?

Struggling Chinese billionaire Hui Ka Yan, founder and chairman of struggling China Evergrande group, has reportedly unloaded shares and personal assets since July, raising more than $ 1.1 billion (7 billion yuan) to date.

Hui Ka Yan’s two private jets (totaling around $ 50 million) are gone, and the massive Airbus ACJ330 widebody plane he bought for $ 220 million is on the chopping block. He also sold his company’s stake in streaming service provider HengTen Networks Group for an additional $ 274 million. Then there are the shares of the China Evergrande group worth $ 1 billion in the Hong Kong central clearing and settlement system. But how does that add up to cover Evergrande’s impending $ 300 billion liability due in March or April 2022? This is not the case.

Given that China’s second-largest real estate developer in terms of sales last year has now lost the ability to sell new homes (its primary business model) and a government bailout seems unlikely, what’s left to prevent Evergrande from defaulting? Even though Evergrande’s financial woes are different from the 2008 Lehman Brother bankruptcy – which sparked a global financial crisis – they could still trigger a potential domestic economic slowdown in China. And that would leave in its wake a long list of Western brands betting the farm on the prosperous and endless Chinese consumer, always spendthrift.

Original article published on November 4, 2021

Hui Ka Yan was born poor in a rural village in China’s Henan Province in 1958. He was brought up mainly by his grandmother in a simple house with a thatched roof that did not protect from the wind and rain. He left when he could, that was in 1978, to study at the Wuhan Iron and Steel Institute, and from there he started his own company – Evergrande – in 1996. In March 2021, at 62, Hui Ka Yan was the 53rd richest man in the world, with a value of $ 27.7 billion.

A classic rags-to-riches story, of course, but with a questionable future. Evergrande, which was behind much of China’s seemingly endless real estate boom, now finds itself saddled with staggering $ 300 billion in debt from decades of rampant expansion. It also faces suppliers and creditors looking for hundreds of billions of dollars in unpaid bills, as well as more than 70,000 investors and stalled apartment building for more than a million buyers. who have invested their savings on the promise of a more prosperous future, which has turned sour.

The crisis stems from the Chinese government’s demand to reduce the amount of debt that companies could take on, which caused a severe shortage of capital for Evergrande, and triggered a series of cascading problems for every bank, business and person. which is linked to it.

Evergrande is running out of options – and money – to ward off creditors. He narrowly avoided the default on an $ 83.5 million bond coupon, as well as another $ 47.5 million interest payment due a week later, although it is not clear where Evergrande gets the money to pay off those debts. But it’s the $ 3.5 billion she owes in offshore bonds that are expected to mature in March 2022 that are causing global concern.

And the hope that Calvary (Beijing) saves the day by bailing them out seems increasingly unlikely, as a government bailout would send the wrong message to a host of other Chinese companies that got rich from speculative firms like Evergrande. Moreover, if common prosperity is to be achieved, as President Xi Jinping has declared, the Communist Party will have to stay true to its socialist roots, echoing the fact that it is possible for everyone to participate in wealth. of a country – and companies that are “too big to fail” actually are not. At least in China.

The hope would be that Evergrande somehow repays its debts by restructuring and in doing so minimizes the impact of its collapse on the financial sector and, worse yet, on the Chinese economy in its own right. together. But what if it is not possible? What if an Evergrande bankruptcy triggers a domino effect in other sectors of the economy, including the Chinese luxury market, on which so many global luxury brands have staked so much? Then what ? A financial panic is hard to slow down once it starts, and it’s not too crazy to suggest that it could lead to a much bigger economic collapse, like in 2008, when one industry nearly ruined the entire world. American economy.

Additionally, given the continuing waves of COVID-19, it’s possible that China will remain shut down for much of 2022, keeping Chinese luxury consumers stuck on the mainland. To date, however, this has not been a problem for most of the global luxury brands. In fact, for many it has been a boom. Not only did the 90,000 to 110,000 Chinese UHNWIs spend more than $ 100,000 each per year (about 25% of all luxury goods sales in China), but the remaining 75% also spent lavishly. A true financial crisis may not slow down the ultra-rich 25 percent, but it will significantly slow down, if not stop, much of the remaining 75 percent from buying It-bags and the latest trends and knick-knacks from the world. global luxury brands betting on prosperity and the growing Chinese luxury market.

Given this, if the Chinese economy were to suffer some kind of collapse, what would be the cost to global luxury brands – or to the world in general? What negative ripple effects would this trigger? And how should luxury brands pivot to stay profitable or, in the worst case, just stay in business with tilting China? The real estate market has been a key driver of economic growth in China since the mid-1990s and accounts for around a quarter of the Chinese economy by some measures. If it goes south, China, and the rest of the world with it, will suddenly find themselves not on shaky ground, but in quicksand. If that moment comes, will China have enough buckets to bail out anything?

Today, Hui Ka Yan is impoverished by $ 15.8 billion, while Evergrande’s stock has plunged 80%. And things only seem to get worse, for everyone.

Stay tuned.


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