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What Happen to Evergrande (恒大)

Your Top Evergrande Questions, Answered

Hong Kong-based columnist Shuli Ren spent years covering Evergrande, China’s largest real estate developer, before its plunge. She sat down with Anjani Trivedi to answer a series of questions that have come to Bloomberg Opinion from readers, investors and several others who have been closely watching the crisis unfold.

For years, Evergrande has had these moments where suddenly everyone was wondering if the company would be able to pay its dues. And this time, it really did come to its knees. So what happened, and why did this happen now?

Evergrande has been called a cat with nine lives. They’ve had many liquidity crises over the years. Short sellers have been shorting them for a good decade in Hong Kong, but every time it has survived. The problem with the cat analogy is that this cat got too fat. And this time, the combination of China’s common prosperity drive and then the sudden pull out of supply-chain financing options was too much for Evergrande. That cat had to go on a diet too fast, and it just couldn't make it. So basically, there were a lot of bills due, and Evergrande didn't have the means to pay them.

By the numbers, everything always seems larger-than-life in China. Can you put it into context?

Most of Evergrande’s projects are not in the first-tier cities of Shanghai, Beijing, Shenzhen and Guangzhou. It's spread out across the smaller cities. To give you some context, in China, third-tier cities have a population of half a million to 3 million. That’s a lot! When Evergrande did its restructuring, it sold 1.6 million apartments, pre-sold. These apartments have not even been built. So right now, the first problem that the government has to solve is to somehow find the money to build these 1.6 million apartments and give them to the consumers who have already paid the price. And that's the scale of China — 1.6 million feels like a lot for the rest of the world. We’re talking about five to six million people not having housing.

Evergrande has over $300 billion in debt due. What’s the financial state of the company?

Interestingly enough, Evergrande actually got really big during President Xi Jinping’s reign. Between 2016 and 2020, its total liabilities almost doubled to $300 billion. And it's pretty interesting because starting in late 2017, President Xi has been trying to reduce property-sector leverage. So you do wonder why Evergrande got bigger, whereas everyone else was asked to be smaller.

Evergrande is the world's most indebted real estate company in the world. Who do they owe this money to?

They owe money to pretty much everyone. Evergrande got money from suppliers, big banks, trust companies and a lot of money was owed to foreign investors. Evergrande is Asia's largest high-yield dollar bond issuer. It has about $20 billion of bonds outstanding, and the foreigners have a big chunk of that.

There's been a lot of anxiety in global markets as to whether this is systemic enough to cause contagion and have wider ramifications. Do you think there will be some form of contagion —whether it’s a lack of confidence or a shift in the way people look at China?

I would prefer to be on the optimistic side. Evergrande is big, but it's about as big as Anbang Insurance Group or HNA Group Co. And Evergrande is not a financial company. It's a real estate developer. In the worst case, it has the lending banks; it has the unfinished projects. So, in a sense, the recovery rate for Chinese consumers and suppliers is better. On the contagion front, global markets are a little bit freaked out in part because of Evergrande’s dollar bond issues outside China. And also, it had relationships with 128 banks. It didn't say which banks, but you do want to know. Well, how about HSBC Holdings Plc? How about JPMorgan Chase & Co? Citigroup Inc.? They are all big players in the Hong Kong market.

What’s the worst-case scenario in terms of an end game?

I think the worst-case scenario would be street protests in China. Evergrande owes everyone a lot of money. We're talking about consumers who bought apartments from them. Evergrande also sold wealth management products to its consumers, to its employees, and small businesses suppliers. There’s the potential for a lot of protests, and the government really doesn't want to deal with that.

People are selling stocks and bonds before they're really asking the question of what exactly went wrong this time. That is definitely a problem. So let’s get to the bottom of it: What was the issue with Evergrande?

We have talked about indebtedness a lot. But one question that I think people need to start digging into is: How about working capital management? In the past year, we have seen some disruption of supply chain financing — Greensill was an example. When Greensill went bust, some of Masayoshi Son’s unicorn tech startups also went bust. Evergrande’s problem is a working capital problem. It was stretched too thin, and it had too little working capital cash. So, I think that people need to start looking at the supply chain side of things.

All of this has really happened over the past few years. How did Evergrande get this big under the reign of President Xi Jinping?

Billionaire founder Xu Jiayin was quite connected and ahead of his time. In a well-cited 2018 speech, Jiayin spoke about common prosperity, which was far in advance of President Xi’s common prosperity push. So, he felt that he was doing the politically correct thing by catering to the smaller tier-three cities. When you have China's largest or second-largest real estate developer coming to a small city, the local government puts the red carpet out.

What should foreign investors be thinking right now? Where do things stand?

Everybody is expecting Evergrande to default. So why hasn’t China formed a creditors’ committee? And what about the recovery rate? In addition to getting those questions answered, people need to start digging into the supply chain financing issues.

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