The protracted downfall of what was once China’s largest real estate developer in terms of assets has reached its likely culmination just prior to the start of the 2024 Spring Vacation.
On 29 January, the Hong Kong Supreme Court issued a liquidation order to China Evergrande Group (中国恒大集团), the property vehicle of Xu Jiayin (许家印), who at one point last decade was China’s wealthiest man.
The court said that the key reason for issuance of the order was Evergrande’s lack of progress on its debt restructuring plans, leading to the company’s assets falling far short of liabilities.
As of June 2023, Evergrande was insolvent. Total liabilities stood at 2.3882 trillion yuan, while its total assets were 1.7439 trillion yuan. Liabilities following the deduction of advance housing payments stood at 1.7842 trillion yuan.
In September 2023, Evergrande announced that chairman Xu Jiayin had been placed under investigation due to suspected “crimes in breach of the law.” The following month, Evergrande revealed that its key subsidiary Evergrande Property (恒大地产) had overdue unpaid debt totalling 301.363 billion yuan, and overdue commercial bills worth 205.933 billion yuan.
Liquidation delayed by hopes for successful debt restructuring
Top Shine Global (佳盛环球), an investment company registered in Samoa that focuses on projects in China, first submitted a winding up application for Evergrande over a year and a half ago on 17 June 2022, in relation to debt worth around 862.5 million HK dollars.
A hearing for the winding up application was subsequently delayed on seven occasions over a period of more than 19 months.
Winding up applications are generally considered a means for creditors to apply pressure on debtor companies. Observers have interpreted the multiple delays on Evergrande’s hearing as indicating that creditors simply wanted the company to implement a more feasible restructuring plan for its debt.
In December 2023 Evergrande applied for its final postponement of its winding up hearing. Local media reported at the time that the applicant had indicated that it did not want the court to issue a liquidation order, nor did it or other creditors oppose Evegrande’s postponement application.
Evergrande stated that it still needed time to renegotiate the restructuring plan, and thus required an extension of five weeks.
Despite those restructuring hopes running aground and the Hong Kong Supreme Court finally issuing a liquidation order, domestic observers say there could still be time for a recovery.
“If Evergrande can submit a new restructuring plan or a white knight shows up, the winding up order could be cancelled or suspended,” said a report from Leju Caijing.
“However, given the vast complexity of Evergrande’s debt, experts point out that the likelihood of a white knight showing up is very low.”
Evergrande flourishes post-GFC
Evergrande was first established in the Guangdong province capital of Guangzhou in 1996, bearing the title “Evergrande Property Group Company (恒大实业集团公司).
Founder Xu Jiayin is a native of northern China’s Henan province and a graduate of the Wuhan Metallurgical Academy. He was 38 years old at the time of Evergrande’s establishment.
The launch of Evergrande coincided with the seminal development of China’s property sector, amidst efforts by Premier Zhu Rongji to reform the Chinese housing market during the 1990’s.
Evergrande fared well during the first decade of the 21st century, eventually listing on the Hong Kong Stock Exchange (HKEX) on 5 November 2009, in the immediate aftermath of the Global Financial Crisis.
On the date of its debut in Hong Kong, Evergrande’s share price closed at 4.7 HK dollars, for a 34.3% rise compared to its IPO price.
The price rise brought Evergrande’s market capitalisation to over 70 billion HK dollars, making it the largest privately operated mainland Chinese real estate company to list on the HKEX.
By 2017, Evergrande’s financial reports indicated that its total assets were 1.7618 trillion yuan, for a YoY rise of 30.4% making it the Chinese real estate sector’s largest company in terms of assets.
Gross profits were 112.3 billion yuan, for a YoY rise of 88.9%, while core net profits were 40.5 billion yuan, ranking first for the sector.
This performance helped to propel Xu Jiayin to the top of the Hurun Rich List for the first time, with an estimated personal wealth of 290 billion yuan.
Concerns arose within the company, however, over the risk incurred by its debt-fuelled breakneck growth.
In the same year that Xu emerged as China’s wealthiest individual, Evergrande announced a change in its business model from the “three highs and one low” (a reference to high debt, high turnover, high leverage and low cost) to one of “the three lows and one high” (a reference to low debt, low leverage, low costs and high turnover).
Evergrande appeared to swiftly renege on these plans for restraint, however. In 2018, the company announced that it had ambitions for total assets to exceed three trillion yuan by the end of 2020, with sales of around 800 billion yuan.
Pandemic prompts Evergrande to rein in debt
The economic duress caused by the Covid-19 pandemic prompted Evergrande to once again publicly commit to reining in its debt-fuelled growth model.
In March 2020, Evergrande announced that it would implement a development strategy consisting of “high growth, controlled scale and reduced debt.”
According to Evergrande, this strategy would involve reducing its debt levels by means of high growth in sales, while strictly controlling the scope of its land acquisitions.
Xu Jiayin said at the time that Evergrande’s interest-bearing debt would fall by 150 billion yuan per annum over the next three years, for a cumulative decline of 450 billion yuan.
In July of 2020, Evergrande’s share price hit its historic peak of 26.77 Hong Kong dollars per share.
Deleveraging efforts rapidly run aground
Despite its public commitment to reduce debt levels in the first year of the Covid pandemic, Evergrande quickly succumbed to liquidity pressures as measures to contain the spread of the disease placed the Chinese economy under additional duress.
On 21 March 2022, Evergrande’s shares were suspended from trading on the HKSE, while the following day it announced it would delay the release of its 2021 annual report.
Two of Evergrande’s affiliates – Evergrande Property Service Group (恒大物业) and China Evergrande New Energy Vehicle Group (恒大汽车) – also announced that the release of their financial reports would be delayed.
Evergrande’s annual report for 2021 was finally released on 17 July 2023, in tandem with its 2022 reports. These documents indicated that in 2021 and 2022 Evergrande sustained net losses of 812 billion yuan.
The company continued to hemorrhage money in 2023, with net losses of 39.25 billion yuan in the first half of the year.
As of the end of the first half of 2023 Evergrande was insolvent, with total liabilities of 2.3882 trillion yuan, as compared to total assets of 1.7439 trillion yuan.
Reports emerged in August 2023 that Evergrande had filed for bankruptcy with a US court, while the following month Evergrande announced that Xu Jiayin had been arrested and placed under investigation by Chinese authorities for suspected criminal wrongdoing.
A report from GMT Research published in December speculates that given the lengthy delay in the publication of its annual reports, Evergrande had potentially exaggerated the scope of its revenues and profits over a period of many years.
How will China’s real estate sector be affected?
The question now arises of how Evergrande’s liquidation will affect China’s much beleaguered real estate sector, which has recently seen housing prices languish and multiple developers struggle to deal with their debt burdens.
Since the start of this latest round of property sector woes that first emerged during the Covid pandemic, Chinese regulators have made it a priority to “guarantee the delivery of housing” (保交楼).
This refers to a policy first mooted by China’s politburo on 28 July 2022, to ensure that real estate developers build and deliver homes to off-the-plan buyers on schedule.
Xiao Yuanqi (肖远企), head of the National Administration of Financial Regulation (NAFR), recently stated that as of the end of 2023 a total of 350 billion yuan in special loans had been allocated towards guaranteeing home delivery, most of which has already reached intended projects.
China’s commercial banks, always heavily beholden to policymakers, have also stepped up to the plate with further complemenary financing, in order to ensure that this centrepiece mission of ensuring home delivery is fulfilled.
State-owned media and Chinese regulators have taken pains to reassure the domestic market, highlighting the willingness of policymakers to provide the real estate sector with financial support to tide over their troubles.
“Even though the issues of Evergrande are indeed severe, the market does not need to be excessively concerned,” said a report from the Shanghai Observer published just following the issuance of the liquidation order.
The report pointed to the swathe of support measures introduced by regulators over the past several years to ensure financial access for troubled property companies.
These include the “16 Financial Measures” (金融16条) introduced in 2022 to bolster the stable and healthy development of the real estate sector” and the “25 Measures for the Private Economy” (民营经济25条) announced last year.
“These measures all strongly indicate that officials will continually expand the intensity of support for the private economy, whether at the conceptual, systemic or implementation level,” the report said.
Regulatory authorities have also highlighted the need for all Chinese financial institutions to continue to make use of the ‘Second Arrow’ of bond financing for private enterprises.
Officials have indicated that as of the start of 2024, the “Second Arrow” of bond financing has already provided over 38 billion yuan in funds to nearly 20 private enterprises, in sectors including real estate and manufacturing.
“[Financial institutions] must support private real estate enterprises in issuing debt to raise funds, and support them in using capital markets for reasonable equity financing,” Shanghai Observer said.
“They must uphold the principles of marketisation and the rule of law, expand financial support for guaranteeing the delivery of homes, and advance mergers and restructuring in the sector.”
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