China’s Evergrande debt crisis: assessing a big mess

Evergrande and the real estate sector in general are important cogs in the Chinese economy, and the overheated real estate market was already showing signs of slowing down. At the same time, few analysts expect good news for the foreign owners of the company’s dollar bonds.

Evergrande said last month it hired financial advisers and said defaulting was a risk.

The real estate bubble in China

Analysts have generally indicated that an Evergrande default will not trigger a crisis of confidence like the one that followed the collapse of Lehman Brothers. But Evergrande has been the biggest real estate developer in a growing Chinese real estate bubble for years. Investments over the past decade in China’s residential real estate market eclipsed the US housing bubble of the 2000s, at least in terms of the share of national economic output.

Construction boom

The scale of Evergrande’s ambitions was astounding. At the end of last year, the real estate developer had more than 700 projects under construction, covering 132 million square meters of total floor area. For comparison, the total area of ​​the Empire State Building is approximately 257,000 square meters.

Part of the uncertainty surrounding Evergrande’s struggles stems from its sales practices. Evergrande sold many homes before they were completed. By mid-year, the company had pre-sold around 1.4 million individual properties with a total value of around $ 200 billion.

Rising demand

Another sign of the magnitude of the housing boom in China: house price-to-income ratios in major Chinese cities make New York, London and Paris appear cheap.

Bills to pay

At the heart of this crisis is Evergrande’s mountain of debt, which stood at around $ 304 billion by the middle of this year. This included $ 89 billion in outstanding debt, 42% of which was due in less than a year.

The company’s borrowings include nearly $ 20 billion in dollar-denominated bonds. On September 23, he failed to pay $ 83.5 million in interest on that offshore debt, leaving foreign investors to weigh their options for recourse. Evergrande has a grace period of 30 days before its non-payment constitutes a default in payment of its obligations.

Evergrande on Wednesday said it has reached a deal with a Chinese state-owned company to sell most of its stake in a commercial bank for $ 1.5 billion, a sign that the country’s authorities are trying to help the property developer deal with its crisis. debt.