The announcement of the possible default yesterday collapsed the shares by more than 11% – they lost almost 80% since the beginning of the year – and largely explained the drop of 1.21% of the Hang Seng index of the Hong Kong Stock Exchange.
Rise and fall
Evergrande accelerated its growth in the last decade to become the second largest property developer in China, with $ 110 billion in sales last year. With sales growth slowing in recent years, Evergrande diversified into non-real estate businesses such as electric cars, soccer, insurance and bottled water.
Evergrande’s rapid expansion has been fueled by debt. It has aggressively borrowed to support land purchases and sold apartments quickly, despite low margins, to get the cycle back on track.
In addition to the usual bond and banking channels, the developer has been criticized for turning to the less regulated shadow banking market, which includes trusts, wealth management products and commercial paper.
Two credit bureaus downgraded its debt rating last week and its share value fell to 2009 levels amid speculation about a possible collapse.
Police blocked protesters’ access to the Evergrande building in Shenzhen. They included investors and contractors to whom the firm owes money.
“Our boss is owed 20 million yuan ($ 3.1 million) and many people here are owed even more,” said a man who gave only his last name, Chen.
“We are really very concerned. There is no clear explanation … They have to pay what they owe, ”he added.
In a statement to the Hong Kong Stock Exchange, Evergrande explained that it had hired financial advisers to explore “all viable solutions” to solve its lack of liquidity and warned that it could not guarantee the fulfillment of its obligations.
The group assured that “the negative news published in the media” has caused “the continuous deterioration in the obtaining of liquidity of the group which, in turn, places enormous pressure on the cash flow and liquidity” of the company.
An estimate from Capital Economics indicates that it was committed to completion of 1.4 million properties by the end of June.
There is a fear of contagion to China’s indebted real estate sector, which represents a quarter of its economy, affecting the banking sector and investors.
“The collapse of Evergrande would be the biggest challenge China’s financial system has suffered in years,” said Mark Williams, chief Asia economist at Capital Economics.
“Markets do not seem concerned at the moment about the potential for financial contagion,” but “this would change in the event of a large-scale bankruptcy” that would likely force the Banco del Pueblo (central) to intervene, Williams said.
“The most likely outcome would be a restructuring in which other developers take over Evergrande’s unfinished projects in exchange for keeping part of the property portfolio,” he added.
Although it has sold stakes in some of its many assets and has offered significant discounts to dispose of real estate, in the first half of the year it registered a 29% drop in its profits. It is also struggling to sell its Hong Kong offices, even at a declining price.
Evergrande was founded in 1996 by Xu Jiayin, who became the richest man in China during the country’s real estate boom in the 1990s. He then invested in massive promotions in new cities and in 2009 raised $ 9 billion in its IPO in Hong Kong.
A year later, the mogul bought a struggling soccer club and renamed it Guangzhou Evergrande, which has since won eight leagues and signed stars like Brazilian Robinho and Colombian Jackson Martínez.