DJ How Beijing's Debt Clampdown Shook the Foundation of a Real-Estate Colossus
2021 Dow Jones & Company, Inc.
By Xie Yu and Elaine Yu
In a risky race against time that ran for two decades, China Evergrande Group turned billions of dollars in borrowed money into the dream of homeownership for millions of Chinese citizens.
It launched project after project in every Chinese province, selling apartments years before they were completed and scratching together enough cash to stay just ahead of massive interest bills.
The party has ended. Years of aggressive borrowing have collided with Beijing's crackdown on debt, leaving the giant developer on the brink of collapse. Construction of Evergrande's projects in many cities has stopped. The company has faced a litany of complaints and protests from suppliers, small investors and home buyers who sank their savings into properties the company promised to deliver.
Cash is so short that this summer, the developer said it began paying bills to contractors and suppliers with unfinished apartments instead of actual money. A paint supplier based in the southeastern province of Fujian said Evergrande recently paid off the equivalent of $34 million in bills with three unfinished properties, which the supplier is trying to sell. At a construction firm in Wuhan, more than 200 employees have been forced to take pay cuts because some of Evergrande's bills are past due, a manager at the firm told The Wall Street Journal.
Former and current employees say layoffs are adding up, and free meals that Evergrande used to provide for staffers at its headquarters have been canceled. In central China's Hubei province, Evergrande has asked the local government to take over homeowners' funds held in escrow accounts so they can't be seized in legal disputes with creditors, according to people familiar with the matter.
Evergrande didn't respond to the Journal's requests for comment. The company said on Sept. 14 that its apartment sales have slowed markedly since June, its asset-disposal plans haven't materialized, and it has hired financial advisers -- a move that brings it closer to a potential debt restructuring.
The looming collapse is a microcosm of China's overheated housing market, in which prices have been climbing for years. Evergrande's problems -- and their ripple effects on the economy and social stability -- are the biggest test of Beijing's rejuvenated campaign to end debt-fueled speculation and stop home prices from surging while the government tries to lower inequality and keep housing affordable for the masses.
Karen Li, a 37-year-old in the southern Chinese metropolis of Shenzhen where Evergrande is headquartered, said she paid the full purchase price of 1.4 million yuan, the equivalent of about $216,800, three years ago for a roughly 400-square-foot apartment in one of its high-rise developments. Ms. Li, who works in retail sales and has yet to take ownership of what would be her first home, said she was notified last month that construction has been delayed.
"I thought it was reliable because it was a major corporation," she said, adding that the property giant's worsening cash crunch has thrown the project's completion date into doubt. "For each ordinary family, this is a disaster."
Evergrande said on Sept. 13 that it was facing unprecedented difficulties, and was doing everything possible to restore normal operations and to protect customers.
Market participants increasingly believe that Beijing will let Evergrande fail and inflict losses on its shareholders and bondholders, but find a way to protect the many people who have paid for unfinished apartments.
Research firm Capital Economics estimates that Evergrande has presold more than 1.4 million apartments valued at $200 billion that it has yet to finish, and said one outcome could be a managed restructuring in which other developers take over the company's unfinished projects.
The company had $89 billion in outstanding debt at the end of June, about 42% of which comes due in less than a year, according to its most recent financial results. Evergrande's total debt burden is the biggest for any publicly traded real-estate management or development company in the world, data from S&P Global Market Intelligence shows.
"It would send the wrong message if [authorities] were to step in at this stage to prevent a default," said Julian Evans-Pritchard, senior China economist at Capital Economics. "It seems very unlikely that they would help a private firm...that's in a sector that they're trying to rein in," he added.
The 25-year-old conglomerate was the epitome of China's housing boom and corporate debt binge. It opened for business right when the country started to introduce private homeownership, and built homes that were mostly targeted at individuals with modest incomes. Many people queued up for hours for the chance to buy an Evergrande apartment, often making full cash payments upfront for homes that took years to complete.
The company's founder, chairman and biggest shareholder, Xu Jiayin, grew up in an impoverished village in central Henan province. He studied hard, went to college, and later worked at a state-owned steel company. He set up Evergrande, whose Chinese name means "constant" and "big," in the southern city of Guangzhou when he was 37 years old, and became known professionally as Hui Ka Yan, the Cantonese phonetic spelling of his Chinese name.
Former employees and others who previously worked with Mr. Hui described him as a workaholic with high expectations and a propensity to take risks and make bold bets. He was also well-connected with wealthy individuals in Hong Kong's business community who were active buyers of Evergrande's stock and debt.
When the company was going public in Hong Kong in 2009, it told potential investors that "rapid property development" was one of its key business strategies that helped maximize its investment returns.
Evergrande bought hundreds of land parcels and sold more apartments than any other developer, and reported record sales year after year as home prices soared.
"Development is the absolute principle," Mr. Hui said during a 2017 speech to employees, citing the late paramount leader Deng Xiaoping. That, coupled with the idea that "cash is king," had ensured the company's steady and rapid development, he added. By the end of 2018, Evergrande was building projects with a floor space of more than 33,000 acres across China, triple the amount just four years earlier.
The company borrowed liberally from banks and global investors, paying interest rates on junk-rated U.S. dollar debt that often ran into double-digit percentages. It expanded into theme parks, healthcare services, mineral-water production and electric-vehicle manufacturing. It enlisted Hong Kong actor Jackie Chan at one point to help promote its bottled water, and bought a professional soccer club in its home province.
The developer also financed construction with the help of short-term IOUs, known as commercial bills, that it issued to contractors and building-materials suppliers.
As it piled on debt, Evergrande paid out billions in dividends to stockholders, with most of that cash going to Mr. Hui as its largest shareholder. The payouts, plus the value of his shares, helped him become one of China's richest men. He has received more than 34 billion yuan, the equivalent of $5.3 billion, in dividends since October 2018. In 2019, he declared that the company would start producing electric vehicles and aimed to become the world's largest player in the fast-growing industry.
Problems started to emerge for Evergrande last year during the coronavirus pandemic, which caused lockdowns in China that damped property sales for months.
Evergrande had regularly offered price discounts on its apartments, and launched more aggressive promotions -- in some cases up to 30% off advertised prices -- to keep cash coming in the door.
It also encouraged its own employees to buy its apartments. In a campaign branded as "wealth creation" for its workers, Evergrande created a lucky draw where winners were picked to buy apartments with a 50% discount.
The company managed to chalk up yet another record year of sales, reporting the equivalent of $112 billion in contracted sales for 2020, up 20% from the previous year.
Trouble was brewing elsewhere. Last fall, Evergrande's shares and bonds tumbled in value after documents circulated online that warned of a looming cash crunch at the real-estate giant. The documents appeared to show Evergrande's communications with the local government warning about potential risks if it was unable to complete the planned listing of a flagship subsidiary.
The company had some years earlier sold stakes in its flagship property-development unit to various strategic investors, and promised them the unit would go public in Shanghai by early 2021, or it would repay them up to the equivalent of $19 billion.
Evergrande decried the documents as fake, and subsequently said most of those investors had agreed not to force it to cough up the funds.
Its troubles weren't over. China's authorities last year laid down what came to be known as the "three red lines" for real-estate developers -- specific leverage ratios to avoid -- all of which Evergrande had breached. The rules prevented the company from taking on new debts.
This past June, worries about Evergrande's finances resurfaced, sending its bond and stock prices tumbling again. Internet users shared posts describing deep discounts to apartment prices offered by Evergrande. The company said it wasn't offering widespread exceptional discounts.
On July 1, Mr. Hui made a public appearance at the Chinese Communist Party's centenary celebrations in Beijing. His presence at the country's most important event of the year was supposed to signal goodwill with top Chinese leaders and assuage concerns about his company, some political observers said.
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September 18, 2021 05:30 ET (09:30 GMT)