As one of China’s biggest apartment developers, Evergrande quickly slipped into financial distress in late 2021, sparking alarm around the world as some analysts feared a collapse that could be China’s “Lehman moment” – and the start of another financial crisis.
Evergrande’s $300 billion cash crisis is compounded by demolition orders
Rather than let the company implode under a pile of $300 billion in debt, Chinese authorities opted for what analysts called a “controlled demolition” — essentially steering the company through a gradual collapse. Since then, the company has continued to limp along, posing an ongoing headache for policymakers trying to restore confidence in the real estate sector.
The group finally came to grips with the extent of its near-fatal cash crisis and the slow progress it has made towards resolving its financial difficulties when it released a repeatedly delayed earnings report late on Monday local time.
Aside from $81 billion in losses, Evergrande’s total liabilities continued to grow in 2022, reaching $335 billion compared to just $251 billion in assets, according to the income statement.
The revelation underscored the Chinese government’s difficult efforts to tackle property debt without bursting a possible property bubble as it tries to ensuring that a tepid post-pandemic recovery is not derailed by a worsening property downturn.
The Chinese economy missed expectations to grow 6.3 percent year-on-year in the second quarter, according to data released on Monday. The slower-than-expected recovery is partly caused by falling property investment, which was down 20.6 percent in June, according to Reuters.
Persistent uncertainty over Evergrande’s fate reflects the poor state of the sector – and threatens to worsen it, analysts warn.
“Evergrande’s insolvency, beyond its own liquidity stalling, is also related to the cooling of housing sales” and the increased pressure on indebted property developers to complete projects, Xie Yifeng, president of the China Urban Real Estate Research Institute, told the state. – ran Beijing Business Today. “It’s a vicious cycle.”
The continued insolvency means “simple debt restructuring may not save Evergrande,” Chen Xin, a finance professor at Shanghai Jiao Tong University, wrote on Weibo, China’s answer to Twitter. The situation is “equivalent to disaster” for the company’s creditors, Chen added.
Rising demand for housing and the government’s reliance on land sales for revenue meant that developers such as Evergrande had easy access to bank loans and could expand aggressively using a loan-to-build model throughout the 1990s and 2000s.
But the government soon became wary of raising debt that could cause default, and regulators severely limited borrowing in 2020. Evergrande was left on the brink of collapse, in a crisis that many saw as marking the end of China’s housing boom.
Reduced access to loans has led to property developers struggling to complete apartments, which has weakened buyer confidence and reduced sales. Floor space purchased in June fell by 28 percent compared to the same period the previous year, official data released on Monday showed.
That slowdown widens a dilemma for Chinese policymakers, who are torn between stimulus measures to revive confidence and determination to defuse financial risks that could ultimately do more damage to the economy.
So far, however, Evergrande has neither collapsed nor significantly improved its financial situation.
Most of the $81 billion in net losses disclosed on Monday were accumulated in 2021, resulting in a crisis and promises of restructuring at the end of that year. But even last year it still reported nearly $15 billion in net losses, underscoring how the company has struggled to resolve its insolvency problems.
In another sign of the group’s uncertain financial future, Evergrande’s external auditor, Prism, said it could not comment on the accounts because it was unable to obtain sufficient evidence about the group’s ability to meet its obligations.
Hong Kong-traded shares in Evergrande have been suspended since March 2022, meaning the company is just two months away from being delisted from the exchange.
Evergrande also said on Monday it will meet its foreign creditors this month to try to reach a debt restructuring deal.