Evergrande’s debt crisis captures the world’s attention

Evergrande is the second-largest property developer in China by sales, ranking 122nd on the Fortune Global 500. Over the past 6 years, from 2015 to 2020, its overall net profit reached 174.34 billion RMB ($27 billion). However, recently the company has been in the global headlines for a debt crisis, with outstanding foreign debts alone of up to 129.1 billion RMB ($20 billion).

Interestingly, as Evergrande takes over the headlines in most western media with a gloomy outlook, the Chinese mainstream media appears quiet – most of them are waiting for a clear signal from the authorities and have reserved their judgements. Those who did share their voice in China did not appear as worried as the voices heard in western media – they view this crisis as a chance for this property giant to restructure and to continue providing its services with a new, positive company image.

While some Chinese citizens have criticised the company for its high-leverage activities, the majority have taken a neutral stance, offering their own analysis on what led Evergrande to where it is now. Two reasons have been discussed the most.

First, that Beijing has been putting effort into deleveraging amongst property developers in China, with new rules released to restrict loans to the real estate sector. “Three Red Lines” policy introduced last August limit borrowings by setting a threshold on liability-to-asset ratio at 70 percent, a net debt-to-equity ratio of 100 percent, and cash-to-short-term debt multiple of more than one time. Those who fail to meet these “red lines” will lose access to new loans from banks and Evergrande was in the “red zone”. This was largely due to its ambitious expansion in the real estate market. Statistics show that the company has so far invested in 293 million m² of land, valued up to 527.3 billion RMB ($81.66 billion) – thanks to loans and bonds. But such high-leverage activity is halted by the new rules, leaving Evergrande with $305 billion debts.

Second, that Evergrande is caught up by other businesses. The company has invested 47.4 billion RMB ($7.34 billion) in new energy cars, with 4.8 billion RMB ($7.43 million) losses seen in the first half of the year. This leaves the debtor even more cash strapped.

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