China’s Evergrande Group has been in the news this week as reports of a deepening liquidity crisis at the conglomerate threaten to shake Chinese markets, particularly in the real estate sector. Evergrande, a real estate developer with more than $300 billion in debt is now struggling to service that debt in the face of shifting market and regulatory conditions. Evergrande’s recent exponential growth into a major real estate developer in China was financed through the incurrence of significant debt. But, during this time, it also paid out significant dividends, with its founder and chairman, among others, receiving more than $5.2 billion in distributions since 2018.
Evergrande is now facing a significant liquidity crunch. It appears to have missed an $83.5 million interest payment that was due September 23 on a $2 billion US-dollar-denominated bond issuance, though the firm has 30 days to cure that payment before an event of default occurs. And it has a second large interest payment due next week on a different debt issuance. To help free up cash, Evergrande has been trying to sell off some of its non-core assets, including at least a portion of its electric vehicle and property management units.
Evergrande’s challenges highlight a slowdown in the Chinese real estate market. Even during the pandemic, housing demand was strong, with some new developments selling out within days, hours, or even minutes. Now, facing both reduced demand and tighter government debt regulation, it’s gotten harder to finance, develop, and sell new housing projects, with some developers even having to demolish partially-built high-rise apartment buildings after being unable to secure financing to complete construction.
Reports out of China suggest that the government isn’t eager to bail out the beleaguered property developer. This has increased concerns about possible contagion throughout the country’s real estate and financial sector, due to perceptions of weakness in real estate markets and concerns that the Xi government is more willing than prior administrations to let big businesses fail. Meanwhile, despite some reports to the contrary, some analysts are skeptical that the effects of Evergrande’s challenges will spread beyond China’s borders, and domestic and international markets appear to have shaken off concerns about any international macro effects caused by Evergrande, at least for now.