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Real estate developer China Evergrande Group is on the verge of collapse, weighed down by giant debt and billions of dollars in real estate that it cannot sell as quickly or as profitably as expected.
As the problems have been brewing for a year, they are reaching a fever pitch now as the conglomerate missed a loan payment in June and more are expected. The company’s offices have been the scene of angry protests this week, and things could get even uglier on Monday when the company will likely miss another key interest payment from its increasingly worried financiers.Evergrande’s possible collapse raises fears that it may drag other parts of the Chinese housing market with it – and impact business interests outside of China as well.
Here is a brief explanation 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 primarily a real estate developer, whose core business is the purchase of land and its transformation into residential real estate. Company founder Hui Ka Yan is a former steelmaker who brought China’s 21st century real estate boom to a fortune that at one point stood at US $ 30 billion last year, good enough to the title of third richest man in China.
The company has built more than 1,300 housing projects in 280 cities across China, with plans for another 3,000 projects underway in various cities across the country.
But like any good conglomerate, it has spread to all kinds of other businesses including bottled water and food, electric vehicles, theme parks, a Netflix-like streaming service with nearly 40 million customers – and even a professional football team.
Why are they in trouble?
Debt – and a lot of it. The company has nearly two trillion yuan in debt on its books, the equivalent of over US $ 300 billion. The company aggressively borrowed money to buy more land to develop and sold apartments quickly with low margins to raise enough money to jumpstart the cycle. Which works well as a business model – until it doesn’t.
At the end of 2020, new rules brought a deeper examination of the company’s finances, which revealed higher-than-expected leverage. That, added to growing construction delays, scared off buyers, creating a vicious cycle. The company began its descent to pariah status as lenders and buyers lost their cool with each other.
Since then, every attempt by the company to distract from its issues has only served to draw more attention to them. Lenders are increasingly destabilized. The existing owners got angry. New sales slowed down, creating a feedback loop that made lenders even more nervous.
WATCH | Investors angrily protest at the Evergrande offices:
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