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China’s economy threatened by a property giant’s debt problems

Every once in a while a company grows so big and messy that governments fear what would happen to the broader economy if it were to fail. In China, Evergrande, a sprawling real estate developer, is that company.

Evergrande has the distinction of being the world’s most debt-saddled property developer and has been on life support for months. A steady drumbeat of bad news in recent weeks has accelerated what many experts warn is inevitable: failure.

The ratings agency Fitch said this week that default “appears probable.” Moody’s, another ratings agency, said Evergrande is out of cash and time. Evergrande is faced with more than $300 billion in debt, hundreds of unfinished residential buildings, and angry suppliers who have shut down construction sites. The company has even started to pay overdue bills by handing over unfinished properties.

Observers are watching to see if Chinese regulators make good on their pledge to clean up the country’s corporate sector by letting “debt bombs” like Evergrande collapse.

How did Evergrande become such a problem?

In its glory days a decade ago, Evergrande sold bottled water, owned China’s best professional soccer team and even briefly dabbled in pig farming. It became so big and sprawling that it even has a unit that makes electric cars, though it has delayed mass production.

Today, Evergrande is seen as a rickety threat to China’s biggest banks.

The company, which was founded in 1996, rode China’s epic property boom that urbanized large swathes of the country and resulted in nearly three quarters of household wealth being tied up in housing. This put Evergrande at the center of power in an economy that came to lean on the property market for supercharged economic growth.

Its billionaire founder, Xu Jiayin, is a member of the Chinese People’s Political Consultative Conference, an elite group of politically well-connected advisers. Mr. Xu’s connections probably gave creditors more confidence to keep lending money to Evergrande as it grew and expanded into new businesses. Eventually, though, Evergrande ended up with more debt than it could pay off.

In recent years, it has faced lawsuits from home buyers who are still waiting for the completion of apartments they partially paid for. Suppliers and creditors have claimed hundreds of billions of dollars in outstanding bills. Some have suspended construction on Evergrande projects.

Much of the cash that Evergrande has been able to drum up has come from presold apartments that aren’t yet completed. Evergrande has nearly 800 projects across China that are unfinished, and as many as 1.2 million people who are still waiting to move into their new homes, according to research from REDD Intelligence.

Evergrande has slashed prices on new apartments but even that has failed to entice new buyers. In August it made a quarter fewer sales than it did a year ago.

Will the regulators step in to save it?

Beijing will be tempted to say “no,” but a collapse could cause serious damage, leaving homeowners, suppliers and domestic investors — potentially numbering in the millions — unhappy. And Beijing has ultimately moved to shore up other large companies with big problems in the past.

For years many investors gave money to companies like Evergrande because they believed that, at the end of the day, Beijing would always step in to rescue it if things got too shaky. And for decades, the investors have been right. But over the past several years, the authorities have shown greater willingness to let companies fail in order to rein in China’s unsustainable debt problem.
Source: Business Standard, NYT

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