The Chinese real estate giant Evergrande, whose debt amounts to 305,000 million dollars, warned of the risk of entering into insolvency proceedings due to two of its subsidiaries, which caused a new collapse in its shares and increased fears that its fall could have consequences for the banking system.
The company’s shares on the Hong Kong Stock Exchange fell more than 11%, accentuating a common trend of approximately the last year, a period in which Evergrande has lost more than 80% of its market value.
A group of investors protested on Monday in the lobby of the headquarters of the multinational real estate company, in the city of Shenzhen (south), hoping to protect your interests before the possible bankruptcy of the company.
The Evergrande group, founded in 1996, benefited from the migratory wave to the cities and the extensions of real estate property rights in the Asian country and in 2009 it was listed on the Hong Kong stock exchange, where it performed well for the next ten years.
Following the growth of the company, its founder, Xu Jiayin, became the richest man from China with a fortune valued at $ 42.5 billion according to Forbes at the end of 2017, the year in which the market value of Evergrande’s shares also reached its peak.
However, the success of the group hid a huge debt With which it had financed its expansion to other sectors such as health services, electric vehicles or even sports (in 2010 it took control of Guangzhou FC, one of the main soccer teams in China).
The China in which Evergrande had flourished had changed: when the company was founded in 1996 China’s urban population accounted for 29% of the total and in 2017 it was already 57%, still with room for growth but not at the frenetic pace of the previous two decades.
In August of last year and to control the rising house prices and limit the capital attracted by the real estate sector, the Chinese government announced the “three red lines” policy: If a developer did not meet certain requirements in terms of its debt-to-asset ratio and its leverage, the authorities would limit its access to credit.
Evergrande, one of the most indebted companies in the sector, then proposed a strategy of “debt reduction and control” which included large discounts in the sale of apartments to try to comply with the parameters set by the authorities.
However, it would be insufficient to deal with the problems that awaited it in 2021.
A black year
In 2021, Evergrande had to face a drop in the value of new home sales and new real estate regulations by Beijing with the stated aim of combating speculation.
Both the group’s income and profits fell between January and June of this year and some projects have been put on hold while assets were put up for sale to generate liquidity and try to solve their cash flow problems, which fell in the first mid-year 45% year-on-year to 86.8 billion yuan (13,431 million dollars).
Although the real estate sector has been one of the pillars of Chinese growth and represents, according to the National Statistics Office, 7.5% of GDP Chinese Vice Premier Han Zheng in July called for even greater scrutiny of the sector and efforts to “accelerate the development of public rental housing” and avoid the use of real estate to “stimulate the economy in the short term.” .
Last week bankruptcy rumors flared again when Evergrande suffered two cuts in its debt rating by the agencies Moody’s and Fitch, which warned of a “high risk of default”.
Today, the company announced that the value of property sales in June, July and August was 153,490 million yuan (23,807 million dollars, 20,150 million euros), figure that supposes “a downward trend“and that it will remain in September, he said in a statement.
The bankruptcy of a giant
On Monday the company published a statement to quell the growing bankruptcy rumors in which it assured that the news about its bankruptcy “they are completely false”, despite acknowledging that the group “faced unprecedented difficulties.”
Michael Pettis, a finance professor at Peking People’s University, explained on his Twitter account: “It is always a bad sign that a company has to officially deny rumors of bankruptcy” and added that “It’s too late to solve this problem internally”.
At the moment, Evergrande is in negotiations with investors in its wealth management products, to whom, according to Caixin, it would have proposed three different payment methods that would enable the company to comply with its obligations and maintain its liquidity.
The effect of the possible bankruptcy of Evergrande, which employs more than 120,000 people, it would be felt not only in the Asian country but also in global markets given the large size of the group, whose liabilities are almost 1.97 trillion yuan (304,821 million dollars, 257,487 million euros).