Evergrande Group, previously China’s largest property developer by sales, is in the midst of a catastrophic financial collapse. This abrupt deflation has reverberated throughout the nation’s real estate economy and is increasingly felt in the overall economy. The company’s debt surged from 27.5 billion in 2022 to a shocking $45 billion. This sudden surge has prompted concerns from creditors and investors alike. As the extent of Evergrande’s liabilities have been revealed, the firm was delisted from the Hong Kong Stock Exchange. This is quite a reversal for a company that, indeed, cheerfully boasted of achieving a $51 billion market capitalization back in 2017.
The crisis returned to a boil when Evergrande’s shares suffered a trading halt in January 2024. Consequently, the company’s market capitalization plummeted to below $280 million. This sudden drop has put hundreds of thousands of would-be homebuyers in a state of uncertainty. Hundreds of thousands are still expected to be completed any day now, with the company now facing hundreds of pending developments across China. The impact of this collapse extends beyond the firm’s doors. This is not just a bail out – it stuns a huge and complicated web of creditors and suppliers that rely on Evergrande for their livelihoods.
With Evergrande’s financial crisis worsening, the company hired Alvarez & Marsal to handle its liquidation proceedings. Such an action would signal a red light to American bondholders and shareholders. Otherwise, they’re destined to watch their investments go up in smoke. Evergrande’s onshore affiliates are bankrupt, providing scant optimism for successful restructuring plans.
China’s property sector has been contending with a deep crisis that has now entered its fourth year. Prices, sales, investment, and construction activity have all crumbled under the weight of the broader economic malaise. Analysts suggest that Evergrande’s default has set off a years-long crisis that continues to weigh on China’s economic growth trajectory.
“China’s property bubble peaked in 2021 and has been deflating since,” – Andy Xie
The shadow of Evergrande’s unraveling has cascaded into huge swaths of the economy. Companies that provided the raw materials for Evergrande’s eye-popping projects now find themselves in similarly precarious situations, owing to unpaid debts themselves. This public health crisis has created a new urgency among Beijing policymakers. They’re just really, really, really, I don’t know, set on not letting this bubble grow to redonkulous heights like we’ve seen over the last 15 years.
“Policymakers in China are never going to let this bubble approach anything like what we saw over the last 15 years,” – Brian McCarthy
Evergrande’s plight is representative of the deeper malaise affecting the whole Chinese property sector. Buyers are putting a premium on national SOEs as well as completed projects. This unfortunate trend paints a concerning picture of the continued overshadowing of safety priorities, though in a chaotic landscape.
“There’s now a clear flight to safety, with purchasers favoring state-owned developers and completed properties over presales,” – Cathy Lu
Hundreds of thousands of homebuyers are currently on waiting lists for their homes. To this end, Evergrande’s leadership has announced home delivery should be first on the agenda. The truth is, major obstacles still stand in the way of realizing these commitments during this continuing fiscal crisis.
“For Evergrande, home delivery remains the priority,” – Octus’ Lu
The ripple effects of Evergrande’s crisis reach far outside of its own dealings. We hope this acts as a poignant counterbalance. High levels of debt in the real estate sector pose considerable risks. Meanwhile, investors who previously gravitated towards investment prospects in China’s property market now find themselves with more obstacles than options. They have few options for accessing onshore assets should something go awry.
“For overseas investors investing in China through Hong Kong, you have limited recourse to onshore assets if things go bad,” – Brian McCarthy