China Briefing puts questions to Dezan Shira’s Chris Devonshire-Ellis.
The media has been full of speculation about the fate of Evergrande, the ailing Chinese property developer. With its share prices having tanked by 75 percent since warnings of large debts – estimated to be as high as US$300 billion, Evergrande has some 1.4 million properties that it has committed to complete – around 1.3 trillion yuan (US$200 million) in pre-sale liabilities, as of the end of June. But those developments and debt repayments have been cast into doubt as it has struggled to sell properties, meaning it does not have the cash to complete other projects to then sell. It has also failed to offload assets including its Hong Kong headquarters as well as subsidiaries such as China Evergrande New Energy Vehicle Group. Yesterday, the company filed a statement to the Hong Kong exchange warning of the “tremendous pressure” it faces. “There is no guarantee that the Group will be able to meet its financial obligations,” the statement said, as the property giant falters under its huge debts.
We asked Dezan Shira & Associates Chairman Chris Devonshire-Ellis his opinion on the implications for the Chinese real estate market, investors, and government intervention.
1) What is likely to happen next for Evergrande?
Obviously, the business requires restructuring and this is currently in hand. However, the greater the negative media coverage, the greater the negative impact on its assets. There will be vested interests looking to acquire assets at fire-sale prices. It seems extremely unlikely that the company can survive in its current format. I suspect given the large amounts of capital involved and the frankly bizarre behavior of its directors that it is inevitable lawsuits will swirl around with the strong potential of criminal charges also being leveled at some of the participants, and especially in Evergrande’s financial services division. .
2) How realistic is the possibility that it will go bankrupt?
It is quite possible. The Chinese are not especially sympathetic when it comes to failures. Beijing let the Guangdong Investment Trust (GITIC) go bankrupt in 1999, and that was for US$4.4 billion even then. The deciding factor for Beijing will be the impact on Chinese social unrest at the domestic home buyer level. They will not want to see large numbers of Chinese citizens left with nothing having invested in uncompleted properties. The decision to let Evergrande go down or restructure, with the possibility of 90% asset haircuts already being mentioned, will depend upon the CPCs ability and desire to protect the homeowning masses, how many of them there are, and the potential fallout. On balance, I suspect the company will be restructured, with corporate investor parts of it allowed to go out of business and the parts with considerable private-public debt reorganized so the impact on Chinese family investments can be controlled and minimized. Beijing will want an orderly dismantling and redistribution of Evergrande’s assets.
3) Will Beijing or the central bank be likely to step in to help handle any restructuring?
I suspect this will be the only solution. In this way they can divide assets up. Corporates will have to take a haircut, public citizens less so and the only way to do that without the risk of litigation is for the State to get involved. It is not likely that parties will sue the Chinese government.
4) How significant is the real estate sector for the Chinese economy?
It will blow over. Evergrande appears to have been fundamentally mismanaged and has borrowed far too much capital and invested in projects well beyond its capabilities. Why does Evergrande own an EV manufacturing company? These are signs of executive over-confidence and arrogance getting in the way of the core business. It is an internal company weakness, born from executive failures, not a market problem. There will be repercussions, however. Beijing has become aware of the trend towards Chinese executives tending too much towards capitalistic style weaknesses upon success, Jack Ma is just one example. Certain celebrities are others. Companies like Evergrande will face more scrutiny at the executive level and I suspect Beijing will be more demanding of the type of executives that operate businesses valued beyond a certain figure.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.