It has been two years since Evergrande initially defaulted on its international bond payments in September 2021. Recently, Evergrande officially announced that its chairman, Hui Ka Yan, has been put under “mandatory measures” on suspicion of crimes. In turn, creditors have increased scrutiny of the company and have questioned its opaque restructuring process.
Hui founded Evergrande, previously named the Hengda Group, in 1996. The company claims to own over 1,300 projects in more than 280 Chinese cities. The parent company of the Evergande Group involves itself in more than just real estate development: from wealth management to electric cars and the food and beverage industry, Evergrande has had a substantial effect on the Chinese economy. As China’s second-largest real estate company in a competitive real estate market, it formed around 30% of its GDP, with some 80% of residents’ wealth locked into the real estate market.
Over the years, China’s housing market has seen remarkable expansion and demand for housing has soared. However, the overconfident expansion of this market eventually led one of the nation’s most prominent companies to its demise. Other factors, such as poor financial management and a leveraged balance sheet to attract investors, contributed to its collapse. The company’s rapid growth and aggressive marketing strategies caused a significant increase in its debt, which became unsustainable once the property market slowed down. Eventually, Evergrande defaulted on 300 billion dollars of liabilities and its shares lost 99% of their value in the past three years, according to BBC. Evergrande’s inability to repay creditors on time has triggered a cash crunch across China’s real estate sector. Seeking to issue new debt, Evergrande planned to release equity-linked notes tied to their Hong Kong electric vehicle businesses. However, this two-year extended plan was most recently interrupted by the Chinese government’s probe into the company. Without new debt or equity issuance, Evergrande will be unable to restructure and meet its obligations adequately. In conjunction with the fact that they have cancelled upcoming creditor meetings, there is no doubt that the government’s investigations into the company have derailed one of the most crucial periods of Evergrande’s reform.
On top of the scrutiny attracted over the past two years over its debt, the recent setback in the restructuring process has put both domestic and offshore bond investors in a worse position. Considering this situation, the company has had a heightened sense of urgency: if Evergrande continues to default on its debt obligations, it will spoil the outlook for Chinese debt in the eyes of foreign investors. In a time when China urgently seeks foreign investment, it is paramount that Evergrande and similar developers stay afloat.