Evergrande Property Group Shares Plummet as Chinese Property Sector Continues to Falter

Investors quickly took the opportunity to dump their shares of the troubled company in the minutes following the opening of the day’s session, wiping its value by billions of dollars.

According to its 2023 interim report, issued the day before trading resumed, the company, led by billionaire Hui Ka Yan, claims its total debt has reached 2.4 trillion yuan ($327 billion). Meanwhile, Evergrande’s net loss for the first half of the year was $5.4 billion, compared to $17.6 billion in sales.

So what caused the company to fall in such a dramatic way and how will it likely affect the Chinese economy? Let’s take a look.

The Three Red Lines Policy

Evergrande, originally known as the Hengda Group, was established in 1996 in Guangzhou, southern China, by businessman Hui Ka Yan. Over time, the company borrowed more than $300 billion as it rapidly grew to become one of China’s largest enterprises.

Evergrande isn’t just in the real estate development game, its divisions include food and beverage production, electric vehicle production, and wealth management. The Guangzhou FC football club, one of the most successful in China, is also owned by the company.

Back in August 2020, Beijing suddenly introduced new regulations to limit the amount of debt carried by major real estate developers, and slow the increases seen in the price of homes. Chinese officials proposed preliminary guidelines nicknamed the “three red lines” to explicitly restrict the borrowing of developers in an attempt to better control the industry, which has a history of being excessively leveraged.

The new rules dictated that the company’s debt-to-assets ratio must be no more than 70%, net debt-to-equity ratio should be no more than 100%, and operating cash flow should be sufficient to cover all immediate commitments and obligations.

Roughly half of the 66 top developers in the nation had complied with the new rules by the end of 2020. Evergrande was one that struggled.

As a result of the new regulations, the company began offering its properties at steep discounts in order to generate enough revenue to sustain the company. Since then, it has had trouble paying the interest on its obligations. This prompted Fitch, a company that evaluates the financial risk of businesses, to declare Evergrande in default back in December 2021.

After the company failed to provide its financial reports for 2021, the Hong Kong Stock Exchange then suspended trading in the company’s shares in March 2022. Last month, Evergrande finally released its 2021 and 2022 results, and over the course of those two years, they revealed a net loss of more than $113 billion.

Chapter 15 Filing

Just over a week ago in New York, the company filed for Chapter 15, raising concerns about rippling effects as China confronts slow economic growth and a weak real estate market.

Evergrande was attempting to restructure its debt while seeking protection from creditors under the Chapter 15 of the U.S. bankruptcy code, which pertains to cases involving multiple countries.

The company clarified on the following afternoon that it is proceeding with offshore debt restructuring and has not filed a petition for bankruptcy, which is a formal declaration that a company cannot pay its debts. In a filing with the Hong Kong Stock Exchange, the company suggested that the Chapter 15 petition is a “normal” aspect of offshore reorganization.

Naturally, the company’s problems have alarmed investors who worry that it will soon go out of business and that this anxiety will spread across China’s real estate and banking industries.

More Turmoil in the Property Sector to Come?

Since the new three red lines policies were implemented, several other major Chinese builders have gone into default as they, too, have found it difficult to stabilize their finances amid falling house demand.

Among them were Fantasia, Modern Land, Kaisa Group Holdings, and Sunac China Holdings, with the country’s top developer, Country Garden Holdings, joining the list in recent weeks.

Country Garden, which employs about 300,000 people, has missed two payments on its multibillion-dollar debt and suggested it was looking into alternative measures to manage their debt.

Moody’s lowered Country Garden’s rating last week, indicating that the agency now considers the developer’s debt to be a “very high risk” asset. The late payments by Country Garden must be made by early September at the latest.

The significance of China’s real estate sector cannot be overstated. More than two-thirds of family wealth is invested in real estate, and the sector may be responsible for as much as 30% of the country’s GDP.

Since the beginning of the crisis, businesses that formerly accounted for 40% of China’s house sales have defaulted on their obligations. This has resulted in supply chain interruptions, lost money for institutional investors, and incomplete dwellings among much more.

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