The Evergrande saga marks the end of China’s long property boom
- Comparisons to how the collapse of US bank Lehman Brothers led to the Global Financial Crisis make great headlines but are flawed, as Fed chairman Jerome Powell has pointed out
- Beijing’s silence speaks volumes about its plans for reining in the overleveraged sector. The writing has been on the wall for debt-fuelled growth since 2016 when Xi Jinping remarked ‘houses are for living in, not for speculation’
His cocky business slogan of “buy, buy, buy” was further illustrated that year by the high-profile announcement that he paid an economist an annual salary of 15 million yuan to embellish and trumpet his vision.
Merely four years later, China Evergrande is now being dismissed as the world’s most indebted property developer, with US$300 billion in liabilities, and is on the brink of collapse. And his electric car unit has not sold a single car, contrary to the plans for a roll-out this year. Share prices of the Hong Kong-listed China Evergrande and its car unit have plunged nearly 90 per cent.
This makes great headlines but the analogy is flawed. On Wednesday, US Federal Reserve Chairman Jerome Powell appeared to have dismissed that analogy by suggesting Evergrande’s debt problems seemed peculiar to China and he did not see a parallel to the US corporate sector, Reuters has reported. Powell noted that major Chinese banks were “not tremendously exposed” and the Chinese government had put new strictures in place for highly leveraged companies.
His remarks seem to have calmed the stock markets as Hong Kong’s main Hang Seng Index rebounded strongly on Thursday.
For Xu’s part, he told company staff on two separate occasions in the past week that he believed that the company would step out of its darkest moments soon and urged all-out efforts to resume construction and delivery of flats to end users.
By all accounts Evergrande’s restructuring is inevitable but how soon and in what ways it will take place will depend on interventions from the Chinese government.
So far, Chinese officials have remained eerily silent and major state media have scarcely mentioned the Evergrande story, even though the financial press have started to run commentaries urging the government to prevent the company from dragging down the entire property sector. On social media, trending videos purportedly showed investors in wealth products issued by Evergrande and buyers of off-the-plan flats gathering at Evergrande’s headquarters and some of its construction sites.
The government’s silent treatment of the Evergrande saga may surprise some investors but it speaks volumes and suggests Beijing plans to take advantage of the crisis to finally rein in excessive leverage in China’s property market.
Xu’s exuberance in 2017 came as another property giant, Wanda, and Hainan Airlines were forced to sell overseas assets and domestic investments in a deleveraging campaign to defuse financial risks.
Some cynics have long held that Xu’s ambitious expansion plans in 2017 went far beyond simply misreading the way the political winds were blowing. He may have held false hopes that debt-fuelled growth would make Evergrande too big to fail. His high-profile plunge into the already crowded electric car business, despite having no relevant technology or experience, may have well been a carefully thought-out gambit to keep banks and investors lending money to his entire business empire.
But Xu’s grand strategy started to unravel in August last year when the government rolled out the policy of “three red lines” to restrict further borrowing by property developers. These comprised liability-to-asset ratios of no more than 70 per cent, net-debt-to-equity ratios of no more than 100 per cent, and a cash-to-short-term borrowing ratio of at least one.
Soon after the policy announcement, a letter circulating online showed Evergrande had sought support from Guangdong provincial government for a corporate restructuring and warned that failure to do so would trigger a chain of risks in the financial system. At that time, Evergrande denied the authenticity of the letter.
For the moment, the Chinese government appears content to allow Evergrande to sort out its own mess but it is under increasing pressure to intervene to avoid a liquidity crisis and contain financial and economic disruption. Moreover, Evergrande’s failure to deliver flats to buyers on schedule could turn into a social instability issue for the government. Evergrande’s impending restructuring will finally mark the end of China’s long property boom.
Wang Xiangwei is a former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper