Too big to fail, or maybe not. Evergrande, China’s leading real estate giant, is one step away from default. Its rating was downgraded to CC by Fitch, equivalent to “very high levels of credit risk” and to CA by Moody’s, synonymous with “extremely speculative and very close to default bonds”. With over $ 304 billion in debt and work on 800 residential complexes never completed, rumors have spread in recent days that the group plans to stop paying interest on loans to two of the creditor banks. The stock tumbled on the stock exchange after investors massively liquidated the company’s shares, which had already plummeted by 70% within a year. Regulators have given the green light to renegotiate the maturity of the debt contracted with banks and other creditors. But it is difficult for this to be enough for the company to recover and be able to repay the 7.2 billion bonds maturing in 2022.
Evergrande’s story is symptomatic of the history of the People’s Republic of China over the last few decades. Xu Jiayin, who was left without a mother when he was one year old, likes to remember that in childhood he ate only bread and potatoes and wore clothes full of patches. We are in the China of the Cultural Revolution, very different from the one that Xu found in 1992 in Shenzhen. Right from the capital of Guangdong, symbol of the grand opening, the same year Deng Xiaoping dismisses Tian’anmen and relaunches the reforms. It is the time of the birth of the private giants. Xu throws himself into the real estate business and in 1996 founded Evergrande. It crosses two historical trends: urbanization and the very rapid growth of the Chinese middle class. The 323 homes of the first Evergrande project are sold in half a day and the company builds 600,000 apartments a year.
The group is listed in Hong Kong in 2009, raising nine billion dollars in the IPO: Evergrande becomes the largest private real estate company in the country and Xu becomes the richest man in mainland China. In the following years, Evergrande invests in various sectors to diversify its business: tourism, bottled water, electric vehicles and football. Guangzhou FC is renamed Guangzhou Evergrande and begins to acquire top-tier international players. Marcello Lippi and then Fabio Cannavaro are hired first as coaches. Result: eight Chinese championships won in nine years two triumphs in the Asian Champions League. In October 2017, Xu was crowned “richest man in Asia” with a fortune of $ 45.3 billion that includes a $ 60 million yacht and a private jet. Now that fortune has plummeted to around 9 billion.
The first signs of problems for Evergrande begin almost concurrently with the moment of greatest wealth of its owner. The crazy pace of construction has led to the accumulation of ever greater debt. The business model involves the sale of apartments with an advance payment and the issuance of short-term debts for the completion of projects. But for some time the giant has been facing a strong liquidity crisis, so much so that in 2020 it had launched typical sales from clothing stores, with a month of apartment sales with a 30% discount. The problems escalated further when the Chinese government decided to take decisive action to bring the debt under control. After launching an onerous bailout plan in which Suning (owner of Inter Milan) was also forced to participate, the government is trying to understand how it can protect Evergrande’s core business, while other private actors could aim to acquire the smaller businesses. , as Xiaomi would be trying to do with the electric car sector.
But for Beijing it is no longer the time of uncontrolled development, now there is a need to protect the long-term objectives. Other big individuals, such as Guangzhou R&F and Fantasia Group, are also experiencing a sharp decline in the yield on their bonds. In an editorial published in the Financial Times, financier George Soros feared the possibility that the Evergrande crisis could trigger a collapse of the entire Chinese real estate sector.