Property developer China Evergrande Group is teetering on the brink of collapse, weighed down by a giant debt load and billions of dollars of real estate it can’t sell as quickly or as profitably as anticipated.
While trouble has been brewing for a year, it’s coming to a head now, as the conglomerate missed one loan payment in June and more are expected. The company’s offices were the site of angry protests this week, and things could get even uglier on Monday when the company is likely to miss another key interest payment to its increasingly concerned financiers.
Evergrande’s possible collapse is sparking fears that it could take other parts of China’s housing market down with it — and impact business interests outside China, too.
Here’s a brief explainer of what you need to know about the story.
What is Evergrande?
Founded in 1996 in the Chinese city of Shenzhen, across the border from Hong Kong, Evergrande is mostly a property developer, whose core business is buying up land and turning it into residential real estate. Company founder Hui Ka Yan is a former steel worker who rode China’s 21st century real estate boom to a fortune that was at one point last year worth $30 billion US, good enough for the title of third-richest man in China.
The company has built more than 1,300 housing developments in 280 cities in China, with plans for another 3,000 projects underway in various cities across the country.
But like any good conglomerate, it has expanded into all sort of other businesses, including bottled water and food, electric vehicles, theme parks, a Netflix-like streaming service with almost 40 million customers — and even a professional soccer team.
Why are they in trouble?
Debt — and lots of it. The company has almost two trillion yuan of debt on its books, the equivalent of more than $300 billion US. The company aggressively borrowed money to buy more land to develop, and sold apartments quickly at low margins to raise enough cash to start the cycle up again. Which works fine as a business model — until it doesn’t.
In late 2020, new rules brought more scrutiny to the company’s finances, which revealed higher-than-expected debt loads. That, coupled with mounting construction delays spooked buyers, setting up a vicious cycle. The company began its descent to pariah status as lenders and buyers lost their nerve in lockstep with each other.
Every attempt by the company since then to distract from its problems only served to draw more attention to them. Lenders got more and more unsettled. Existing owners got upset. New sales slowed, which created a feedback loop that got lenders even more jittery.
WATCH | Investors angrily protest at Evergrande offices:
In June, the company admitted it missed payment on a loan. The next month, a Chinese court froze a $20 million bank deposit at the request of one its lenders. At least one creditor, a paint supplier, is reportedly being paid in apartments that won’t be ready until 2024.
According to data compiled by Bloomberg, on the 19th of July, presales at two projects in Hunan were halted. Three days later, Hong Kong banks stopped offering mortgages on any incomplete projects by the company in the city. On August 9, two more projects in Kunming stopped construction due to missed payments, followed by similar halts at projects in Nanjing and Chengdu. Things have snowballed ever since. The company’s stock price has cratered by 90 per cent in the past year, and most of their bonds are in junk status.
The company is behind on its obligations to more than 70,000 investors. More than one million buyers of unfinished projects are in limbo. And the pace of problems is picking up. “Sales could slump further as the developer may struggle to restore potential homebuyers’ confidence,” said Lisa Zhou, an analyst with Bloomberg Intelligence.
Monday figures to be an inflection point for the company as Evergrande is supposed to make an $80 million interest payment on one of its many loans, and there’s next to no chance it will pay that, which could start the clock ticking toward some undesirable outcomes.
So what could happen?
A number of bleak B words are on the table — bankruptcy, breakup, buyout, or bailout — and none of them are ideal.
The first option would be the most painful.
“If, as expected, Evergrande is defaulting on its debt and goes through a restructuring, I don’t see why it would be contained,” Michel Lowy of distressed debt investment firm SC Lowy, told Reuters.
But because of the Chinese government’s long-standing desire for stability, that’s also the least likely outcome. The company owes money to 128 different banks, and was behind almost one out of every 20 property sales in China in the past five years. Evergrande permanently employs almost 200,000 people, but hires almost four million people a year to work on various projects.
With a reach that wide, analysts who cover the sector are confident that Beijing won’t let the company simply collapse. “Evergrande’s escalating crisis may prompt government action to prevent social instability,” Zhou said.
More likely is some version of the next two options, a breakup or buyout, where the company sells assets to raise cash and help is brought in to run things. “State-owned enterprises or other developers may also take over Evergrande’s projects, after Chinese officials sent accounting and legal experts to examine the company’s finances,” Zhou said.
A full government bailout, however, is just as unlikely. China has been cracking down on its high-flying technology sector, trying to regulate and ban cryptocurrencies and reining in excesses in all sorts of sectors. Evergrande’s problems may be a test case in Beijing’s desire and ability to manage every facet of the growing economy.
Economist Art Woo with Bank of Montreal said in a note on Friday that he also doubts a bailout is coming. “As for who could bear the losses, that’s frankly tricky to predict, but we think it’s reasonable to believe that the authorities are unlikely to bail out equity holders or creditors in an effort to prevent moral hazard from increasing and improve financial discipline,” he said.
More likely is some sort of organized wind down, to keep damage to a minimum. “We do not believe the government has an incentive to bail out Evergrande (which is a private-owned enterprise),” Nomura analyst Iris Chen said in a note to clients.
“But they will also not actively push Evergrande down and will supervise a more orderly default, if any, in our view.”
WATCH | CBC reported on China’s ‘ghost cities’ of empty towers nearly a decade ago:
Is there an impact outside China?
Not much, directly, although the company does have assets in Europe and North America — including the ritzy Château Montebello resort in Quebec — but the company’s woes are nonetheless a cautionary tale for people everywhere.
China has been in a housing boom for more than two decades now, as more and more people put money into residential real estate — almost regardless of the price and demand for the underlying asset.
Video went viral on social media this month of a 15-tower condo development in Kunming being dynamited to the ground because it was a ghost city with no actual residents, eight years after being built.
While that wasn’t an Evergrande project, the worry is that there are many others out there like it.
Re-upping the stunning demolition videos showcasing housing oversupply in China: 15 skyscrapers in China that were part of the Liyang Star City Phase II Project were just demolished after sitting unfinished for eight years due to absent market demand. <a href=”https://t.co/UByqjk8QXX”>pic.twitter.com/UByqjk8QXX</a>
China’s Lehman Brothers moment?
The 2009 financial crisis was sparked by the failure of two investment banks, Bear Stearns and then Lehman Brothers, which exposed just how much bad debt there was in the system, and caused a chain reaction of worry down the line
That may be far fetched for the economy as a whole this time around, but it’s certainly on the table for China’s housing market at least.
“Lehman (was) very different as it went across the financial system, freezing activity,” said Patrick Perret-Green, an independent London-based analyst.
“Millions of contracts with multiple counterparties, everyone was trying to work out their exposure,” he said. “With Evergrande it depresses the entire real estate sector.”
“There are other developers that are suffering from the same problem of no access to liquidity and have extended themselves too much,” Lowy said.
Simon MacAdam, an economist with Capital Economics, says the Lehman parables are unwarranted.
“The China’s Lehman moment narrative is wide of the mark,” he said. “Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy.”
Regardless, the Evergrande saga is a cautionary tale about the down side of unrestrained real estate speculation anywhere.
As Woo put it: “A default or bankruptcy does not pose a Lehman-type threat … but it’s still bad news for the economy.”
Lawmakers Plan to Tank the Startup Economy – The Wall Street Journal
Thriving entrepreneurship is critical to a strong and growing economy—and especially to the post-Covid recovery. But the incentive to take the personal and financial risk of launching a company is now under threat.
The Platform Competition and Opportunity Act, introduced in June by Reps. Hakeem Jeffries (D., N.Y.) and Ken Buck (R., Colo.), would restrict and in some cases ban the acquisition of startups by larger companies. Ostensibly, the goal is to foster competition by preventing dominant online platforms from expanding…
Thriving entrepreneurship is critical to a strong and growing economy—and especially to the post-Covid recovery. But the incentive to take the personal and financial risk of launching a company is now under threat.
The Platform Competition and Opportunity Act, introduced in June by Reps.
(D., N.Y.) and
(R., Colo.), would restrict and in some cases ban the acquisition of startups by larger companies. Ostensibly, the goal is to foster competition by preventing dominant online platforms from expanding their sway through acquisitions. But the legislation risks hurting the startups it aims to benefit.
Research in recent years has demonstrated that new businesses account disproportionately for the innovations that drive productivity growth, economic growth and new job creation. But a third of new businesses fail by the second year, half by their fifth. Fragile startups face three principal fates: fail, go public or be acquired, with failure the most common. Many entrepreneurs dream of taking their companies public, but most startups never achieve the scale that requires.
Acquisition, therefore, is the most likely avenue for successful entrepreneurs and their employees to realize the value of their creation. In a typical year, more than 10 times as many startups are acquired as go public. According to a recent report by Silicon Valley Bank, nearly 60% of startups expect to be acquired. Acquisitions also enable startup investors to reclaim their capital, realize any gains, and recycle their money into the next generation of startups.
As a serial entrepreneur, I understand the threat the legislation poses to America’s startup ecosystem. In 2001 I started SVOX, a Switzerland-based company that developed text-to-speech software for automotive and mobile device applications. After years of hard work, my partners and I sold the company to
for $125 million.
In 2006 I moved to the U.S. to earn a master’s degree in technology management from the Massachusetts Institute of Technology. In 2008 I launched Pixability, a pioneer in video marketing software and services that now employs 85 people in Boston. On the eve of the pandemic, I founded juli, an artificial-intelligence-powered health software company that manages chronic conditions. For the third time in my career, I’ve launched an investor-financed company that will have to return the invested capital by either going public or getting acquired.
The Platform Competition and Opportunity Act would threaten the startup ecosystem by obstructing the most common positive outcome for entrepreneurs and their investors, short-circuiting the process by which value-creating innovation helps fund the next generation of new businesses. Had it been in effect for the past five years, the act would likely have blocked more than 100 acquisitions of venture-capital-backed companies, according to the National Venture Capital Association.
If investors are unable to liquidate investments to reclaim capital and potential gains, they won’t risk their capital by investing. Without investors, there is no startup ecosystem.
The bill poses an even more serious risk—that it will bring about the opposite of what it intends by tilting regulatory circumstances in favor of larger companies. Something along these lines happened in 2002, when Congress passed the Sarbanes-Oxley Act to enhance the quality and reliability of financial data reported by publicly traded companies. Section 404 of the act requires companies to disclose the findings of an external audit of the scope, adequacy and effectiveness of the company’s internal control structure and procedures for financial reporting.
Section 404, only 170 words long, has accounted for the majority of the cost of complying with Sarbanes-Oxley, estimated to be well over $1 million per company annually. The cost and burden of complying with section 404 is a major obstacle for many new and rapidly growing companies hoping to access the capital markets for financing.
For me personally, that meant giving up (for now) on my girlhood dream of running a public company.
In an interview with Bloomberg in March 2012,
a co-founder of America Online, said: “When AOL went public 20 years ago, we only raised $10 million. Nobody could do that now because of the cost of Sarbanes-Oxley.” In testimony before the House Financial Services Committee in June 2012,
a former vice chairman of Nasdaq, said that the number of small-company IPOs valued at $50 million or less plummeted by 92% in the six years following the enactment of Sarbanes-Oxley.
The Platform Competition and Opportunity Act risks similar unintended consequences. By dramatically raising the regulatory hurdles and compliance costs of acquisitions, the act would benefit large incumbent companies that have money and teams of lawyers to navigate the new legal landscape. Smaller companies would be shut out. And the narrowing of the acquisition market to only the largest companies would drive down prices for smaller companies like mine. In this way—ironically—the bill would likely deepen and widen the competitive moat protecting large incumbent companies from smaller, more innovative challengers.
If lawmakers are concerned that acquisitions by large technology companies undermine competition, the better course of action would be to increase the frequency and capacity of existing regulatory scrutiny by augmenting the resources of the Federal Trade Commission and the Justice Department’s Antitrust Division, which already have the authority to block anticompetitive mergers. Between 2010 and 2020, the government won 79% of challenges to mergers in federal court, according to a paper published in the Review of Industrial Organization.
Thriving entrepreneurship is the essential pathway to the faster economic growth, job creation and opportunity expansion that the American people need. Legislation that would virtually shut down a major avenue of exit for entrepreneurs and their investors, and strengthen the competitive position of large companies, risks major damage to America’s entrepreneurial ecosystem and the post-pandemic recovery.
Ms. Hein is founder and CEO, most recently, of juli, a digital health startup.
What’s behind the high price of everything–and what will be the political cost?
The Wall Street Journal Interactive Edition
GLOBAL ECONOMY-China's economic wobbles cast long shadow for Asia – Yahoo Finance
By Chen Lin and Cynthia Kim
SINGAPORE/SEOUL, Oct 19 (Reuters) – China’s economic setbacks have darkened the outlook for countries in its orbit, from South Korea to Thailand, as a sharp factory slowdown and trade bottlenecks in the world’s second-largest economy hit Asia on the supply as well as demand sides.
China’s gross domestic product faltered in the third quarter, data showed this week, with growth hitting its weakest in a year, hurt by power shortages, supply chain snags and a property market crisis.
For China’s trading partners, the slippage presents new risks to what is shaping up to be a bumpy global recovery from the pandemic slump.
“Yes, growth elsewhere, namely the U.S. and Europe, appears robust,” wrote Frederic Neumann, co-head of Asian economics research at HSBC. “But it is China that’s been the main engine for growth across the region – and as it sputters, Asian economies will lose much of their torque.”
HSBC analysis showed Asia-Pacific economies from South Korea to New Zealand far more correlated to changes in China’s growth than they were to changes in U.S. or European GDP.
For every percentage point China added to its growth, trade powerhouse South Korea reported about 0.7 of point of additional growth, the bank’s economists said.
South Korea was by far the most sensitive to changes in Chinese growth, according the analysis, followed by exporting nations Thailand and Taiwan.
An anticipated Chinese slowdown has already prompted Citi analysts to downgrade growth projections for economies in the region, including South Korea, Taiwan, Malaysia, Singapore and Vietnam.
A Reuters Corporate Survey last week showed a majority of Japanese firms were concerned that a slowdown in China, Japan’s largest trading partner, would affect their business.
The slowdown is being felt across most of China’s economy, from the retail to factory sectors, which posted its weakest output growth since the start of the pandemic.
China’s auto sales slumped 19.6% in September from a year earlier, industry data showed last week, falling for a fifth consecutive month amid a prolonged global shortage of semiconductors and the power crunch.
Similarly, sharp declines in new construction starts in China’s property market, due to a regulatory crackdown, loom as risks for exporters of raw materials, such as Australia.
Iron ore prices have nearly halved since hitting a record in mid-May, with demand hurt by China’s steel output curbs and the property slowdown.
Last week, mining giant Rio Tinto downgraded its 2021 iron ore shipments forecast, mostly due to tight labour market conditions in Australia, but it also warned of headwinds from China’s regulatory crackdown.
Despite the risks from China, analysts say Asia will be able to prevent a precipitous collapse in domestic demand, as improved vaccination rates allow countries in the region to shake off COVID-19 restrictions.
Similarly, Chinese demand for some goods, such as fuel and food, remains firm. That means for now, central banks are unlikely to swerve from their general shift away from crisis era monetary settings.
Singapore last week tightened its monetary policy.
Beyond the broader demand shock, complications for economies in Asia and elsewhere could come from worsening supply-side problems in China, such as the power crunch.
So far, China’s manufacturers and exporters have yet to significantly pass on higher costs caused by supply shortages of everything from coal to semiconductors.
But analysts warn the situation around inflation is fluid.
While weaker demand could relieve pressure on prices, supply chain bottlenecks, if unresolved, could create a “stagflation” nightmare in which surging prices are accompanied by stagnant growth.
“I think it could potentially be a bit of a double whammy now. Because China is one of the economic engines for the region, any slowdown can affect the demand for regional goods and services,” said Selena Ling, head of treasury research and strategy at OCBC Bank.
“Secondly, the ongoing power crunch, in all likelihood, policymakers will prioritise home (use) for winter demand over industrial activity. So that could exacerbate global supply chain disruptions.”
(Additional reporting by Tetsushi Kajimoto, Kantaro Komiya and Leika Kihara in Tokyo; Orathai Sriring in Bangkok; and Tom Westbrook in Singapore; Writing by Sam Holmes; Editing by Raju Gopalakrishnan)
U.S. energy transition to create Mexico auto jobs, climate envoy Kerry says
Mexico‘s manufacturing sector stands to benefit from a U.S. transition away from fossil fuels including through the creation of jobs for building electric vehicles, John Kerry, climate adviser to U.S. President Joe Biden, said on Monday.
“Mexico’s industrial base, already deeply integrated with the rest of North America, absolutely stands to benefit from the energy transition,” Kerry said alongside Mexican President Andres Manuel Lopez Obrador in Mexico’s Chiapas state, near the southern border with Guatemala.
Kerry traveled to Mexico to meet with his counterparts ahead of the upcoming United Nations’ COP26 climate conference in Glasgow, Scotland, which neither Lopez Obrador nor his foreign minister is expected to attend.
“When we switch from gasoline to electrified vehicles, there are going to be a lot of good-paying jobs here in Mexico because of the connection already of the automobile industry and our two countries,” said Kerry, who visited a flagship reforestation project promoted by Mexico.
The production of automobiles in North America is highly integrated through the U.S.-Mexico-Canada Agreement (USMCA)
Under Biden and Kerry, the United States has stressed the need for more aggressive action to address global warming. Lopez Obrador, on the other hand, has cut the environment ministry’s budget as part of an austerity drive and dismantled policies promoting private investment in renewable energy.
Research coalition Climate Action Tracker rates Mexico’s overall climate plan as “Highly Insufficient”, saying its policies and actions will “lead to rising, rather than falling, emissions and are not at all consistent with the Paris Agreement’s 1.5°C temperature limit.”
Lopez Obrador says he will tackle carbon emissions by revitalizing dilapidated hydropower projects under state control and through the tree planting program, called Sembrando Vida, which aims to plant 700,000 trees.
But he has also focused on reviving state-run oil and power generation companies, and his government has prioritized fossil fuels over renewable energy sources for Mexico’s national grid.
Mexico, the second-largest greenhouse gas emitter in Latin America, is seen as vulnerable to climate change and extreme weather patterns, with tropical cyclones and floods battering the country every year.
By 2030, Mexico plans to reduce greenhouse gas emissions by 22% over a business-as-usual scenario. Brazil, the region’s biggest polluter, aims to cut its emissions by 43% by 2030 compared to 2005 levels.
(Reporting by Anthony Esposito and Drazen Jorgic; Editing by Cynthia Osterman and Karishma Singh)
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