Why China’s economy is threatened by a property giant’s debt problems from freeamfva's blog

Why China’s economy is threatened by a property giant’s debt problems

Every once in a while a company grows so big and messy that governments fear what would happen to the broader economy if it were to fail. In China, Evergrande, a sprawling real estate developer, is that company.To get more finance news China, you can visit shine news official website.

Evergrande has the distinction of being the world’s most debt-saddled property developer and has been on life support for months. A steady drumbeat of bad news in the recent weeks has accelerated what many experts warn is inevitable: failure.

Ratings agency Fitch said this week that default “appears probable.” Moody’s, another ratings agency, said Evergrande is out of cash and time. Evergrande is faced with more than $300 billion in debt, hundreds of unfinished residential buildings and angry suppliers who have shut down construction sites. The company has even started to pay overdue bills by handing over unfinished properties.

Observers are watching to see if Chinese regulators make good on their pledge to clean up the country’s corporate sector by letting “debt bombs” like Evergrande collapse.

In its glory days a decade ago, Evergrande sold bottled water, owned China’s best professional soccer team and even briefly dabbled in pig farming. It became so big and sprawling that it even has a unit that makes electric cars, though it has delayed mass production.

Its billionaire founder, Xu Jiayin, is a member of the Chinese People’s Political Consultative Conference, an elite group of politically well-connected advisers. Xu’s connections probably gave creditors more confidence to keep lending money to Evergrande as it grew and expanded into new businesses. Eventually, though, Evergrande ended up with more debt than it could pay off.

In recent years, it has faced lawsuits from homebuyers who are still waiting for the completion of apartments they partially paid for. Suppliers and creditors have claimed hundreds of billions of dollars in outstanding bills. Some have suspended construction on Evergrande projects.

Evergrande might have been able to keep going if it weren’t for two problems. First, Chinese regulators are cracking down on the reckless borrowing habits of property developers. This has forced Evergrande to start selling off some of its sprawling business empire. That’s not going so well. It has yet to sell its electric vehicle business, despite talks with prospective buyers. Some experts say buyers are waiting for a fire sale.

Second, China’s property market is slowing and there is less demand for new apartments. This week the National Institution for Finance and Development, a prominent Beijing think tank, declared the property market boom “has shown signs of a turning point,” citing weak demand and slowing sales data.

Beijing will be tempted to say “no,” but a collapse could cause serious damage, leaving homeowners, suppliers and domestic investors — potentially numbering in the millions — unhappy. And Beijing has ultimately moved to shore up other large companies with big problems in the past.

Authorities hauled Evergrande executives into a meeting last month and told them to get its debt in order. They have also continued to tell its banks to scale back their lending to the developer.A campaign by the central bank to tame property debt and reduce the banking sector’s exposure to troubled developers should mean that an Evergrande failure would have less of an impact on China’s financial system.