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How Evergrande found itself on the wrong side of China’s regulators

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China Evergrande Group has constructed high-rise apartments in Taicang’s Riverside Palace project, Jiangsu, China.

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BEIJING — Chinese developer Evergrande made little progress toward complying with Beijing’s crackdown on real estate debt — until it was too late for investors who poured money into its offshore bonds, now worth at least $19 billion.

Global investors are worried about whether the developer, which has a debt load of over $300 billion, will be able to pay it back. There are concerns about potential spillovers into China’s economy and real estate sector.

Evergrande was a company that had many of the same issues as other Chinese property companies, but failed to act quickly enough to comply with government regulations.

Evergrande failed to pay several deadlines for payments since September. The latest payment was made on October 11th, with interest due on one its U.S.-dollar-denominated bonds. Its liabilities increased. total missed payment to $279 millionAccording to Reuters:

Although the developer took on debt over many years, it has now been plagued by problems that have arisen from tighter regulations in the past two decades, analysts claim.

China’s central bank said that Friday was a good day for real estate developers. Evergrande a unique caseIn which the company blindly diversified, expanded. The company had no indications that a complete rescue plan was in the works.

This is how the most indebted real estate developer in the world ended up in such dire financial straits.

Evergrande crosses all red lines

Chinese authorities met 12 developers of real estate in August 2020 and demanded that they lessen their debt dependence. Evergrande was among those at the meetingThe state media stated that.

It was described as follows: “three red lines” policyThis has not yet been announced. Three specific balance sheets conditions must be fulfilled by developers if they wish to acquire more debt, according to state media. Developers must limit the amount of debt they have in relation to cash flow, capital and assets.

Julian Evans-Pritchard (Capital Economics senior China economist) stated that all twelve developers present at the meeting had violated at least one red line last summer.

Problem is that the whole industry relies on finance too much.

Zhang Yingji

senior fellow, ICR

Evergrande is now a year old GreenlandEvans-Pritchard stated in a Sept. 22 Report that the companies remaining had crossed at least one red line from the original 12 firms. He stated that Greenland had already crossed one red line, and Evergrande, as of the end June, had broken all three.

“Among the top 30,” however, is not. [developers]”Less than a third surpass the limits now, in comparison to over two-thirds one year ago,” he stated. Even firms not subject to these rules generally comply.”

In late August, Evergrande warned investors about default. A few days prior, China’s central bank and other authorities told the company’s executives in a rare meetingto solve their debt problems.

Zhang Yingji (senior fellow, Chinese real-estate research institute ICR) stated that the problem facing this industry is its dependence too heavily on finance.

According to him, the limitations on the speed at which developers can grow are necessary in order for affordable housing to be a key part of China’s economic development plan over the next five-years.

The average price for a residential home in China — typically an apartment — more than quadrupled between 2001 and 2019, while that of a new house in the U.S. rose 80% during the same time, according to official data from China and the U.S.

Beijing had begun in 2016 to encourage the slogan “Houses are meant for living in and not speculation” when it experienced a price rise. Many compared it to a bubble.

Evergrande’s U.S. dollar overseas debt

Reliance on pre-sales heavily

Evergrande was a Chinese developer that sold apartments directly to individuals before their property had been completed. The company was able to make cash and borrow money to build the property.

Over the last decade, the value of Evergrande’s properties under construction rose so quickly that it far exceeded the value of the company’s completed projects as well as what the company was able to sell.

Evergrande owned 1.26 trillion Yuan ($195.89 million) of construction projects by 2020. However, this was only 70% of the property the company was able sell during that year. It was 723.2 billion Yuan. Projects were only completed for 148.47 trillion yuan.

Just over half of Evergrande’s assets were made up of property under development. This figure rose from 54.3% to 54.7% at the end last year.

Evergrande was unable to finance financing because it became impossible to keep up with the high number of construction projects.

Moody’s analysts reported that financial institutions “have already curtailed direct exposures Evergrande in the last two years,” they said in an October 11 note.

The company had borrowed 393.9 billion from trust companies, banks and other financial houses at the end June. That’s a drastic drop from the 604.7 billion yuan reported at the beginning of 2019.

Evergrande is investing in many of its projects in China. There is an abundance of housing available, unlike China’s biggest cities which have a severe housing shortage.

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The company is also in a tougher situation than other developers because of its heavy use of supplier commercial bills – tradeable contracts for paying suppliers and construction contractors, S&P Global Ratings analysts said in a Sept. 20 note.

The report stated that Evergrande’s contract sales fell more than any other sector issuers experiencing distress.

Without sufficient financing, it is harder to keep up construction and other assets that can be sold, S&P said. Evergrande will lose its most valuable source of cash flow, the contract sales of its real estate projects.

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