馃攳
How Evergrande Became China鈥檚 Biggest Financial Headache - YouTube
Channel: Bloomberg Quicktake: Originals
[2]
So Evergrande is this sprawling giant
[5]
of a real estate developer.
[7]
As recently as 2016,
[9]
it was the largest real estate developer
[11]
in China by sales.
[13]
Evergrande is also the world's
most indebted developer.
[18]
The firm has more than 300
billion in liabilities,
[21]
and it may actually be on
the hook for more debt,
[24]
which isn't necessarily revealed
[26]
on its balance sheet.
[27]
Evergrande, once one of China's
[29]
most successful developers,
[31]
has struggled to pay its debt for months.
[33]
And its liquidity scares unsettled
[35]
the global markets.
[36]
It's been a volatile week for
Evergrande to say the least.
[40]
Recently, there has been
[41]
too much bad news surrounding this name.
[46]
The battle for survival is intensifying.
[49]
In December,
[50]
Evergrande failed to pay
two dollar bond coupons
[52]
and was officially declared a defaulter
[54]
for the first time.
[56]
Evergrande is prepared to enter
[58]
a formal debt restructuring process,
[61]
which would be one of China's largest
[63]
and most complex.
[65]
China Evergrande is Beijing's
biggest worry right now.
[69]
And it's not just about Evergrande,
[71]
it's the spill over into the
rest of the property sector,
[75]
into the economy more broadly.
[77]
This final resolution for Evergrande is
[79]
just getting started.
[81]
It really marks the end of an old chapter,
[83]
the start of a new chapter for China.
[92]
The chairman, Mr Hui,
[94]
he came from really stark poverty.
[97]
He was born in the late
1950s in Henan province,
[101]
which is a major rural,
agricultural province
[104]
in the middle of China.
[120]
And all he wanted to do was
[122]
to get out of his village.
[123]
He did that by getting into universities.
[126]
He went to college, he studied metallurgy.
[129]
And in the late 1990s,
[131]
he started Evergrande,
[132]
and got into real estate development.
[133]
And in the two decades after that,
[135]
he built it into this
gigantic real estate company.
[147]
Hui is seen, over the past two decades,
[149]
to have been particularly savvy about
[151]
how he has expanded his business;
[153]
aligning his investments
[155]
and his growth and expansion into property
[157]
alongside the agenda of authorities.
[162]
He was able to grow the company so quickly
[164]
and into such a tremendous size
[166]
because in the background
[168]
China's economy was booming.
[170]
China was trying to make room
[173]
for hundreds of millions of people moving
[175]
from the countryside into the cities.
[177]
That was fueling a boom in demand
[180]
for property, for homes, for apartments.
[182]
At the same time,
[184]
as the result of the
financial crisis in 2008,
[187]
China introduced this
massive stimulus package
[190]
that flooded the economy with money
[192]
and made lending very easy, very cheap.
[195]
The company was able to translate
[198]
some of its landholdings,
[199]
use that as collateral for loans,
[202]
and then help it get control of more land.
[204]
And then, to get more loans,
[206]
and it was a cycle that went like that.
[209]
Through massive borrowing,
[211]
today Evergrande has become
a sprawling conglomerate
[214]
that controls land five
times the size of Manhattan
[217]
and owns more than 1,300
real estate projects
[220]
in 280 cities.
[222]
It has businesses in new energy vehicles,
[226]
and historically also has
invested in football companies
[230]
and even bottled water.
[232]
But as Chinese President Xi Jinping began
[235]
to control financial risks
in the country's economy,
[238]
Hui's debt-fueled expansion
strategy was called
[241]
into question.
[242]
Starting in late 2015 and '16,
[245]
there was this greater emphasis on curbing
[248]
the amount of debt in the Chinese system.
[250]
By lots of different measurements
[252]
there is a tremendous
amount of debt in China.
[255]
It's not just the amount
of debt that China has,
[258]
it's the pace at which
it's accumulated that debt.
[262]
There is a real concern.
[263]
If Chinese companies borrow a lot of money
[266]
and build bridges to nowhere,
[268]
roads that people don't use,
[270]
homes that no one wants to live in,
[272]
then that money is wasted
[274]
and when they have to pay it back,
[275]
there's not going to be any money there
[277]
to pay it back with,
[278]
and that is going to mire the economy.
[283]
A big part of the debt problem lies
[285]
in China's real estate sector,
[287]
which accounts for about 30% of
[289]
the country's dollar-denominated bonds.
[291]
To curb reckless borrowing,
[293]
in 2020, Chinese authorities drafted
[295]
three red lines-
[297]
metrics regarding debt that
developers will have to meet
[300]
if they want to borrow more.
[301]
In September 2020, Evergrande
faced a liquidity scare.
[305]
And people were very concerned
[306]
about a credit crunch at the firm.
[309]
That was because a group
of strategic investors had
[312]
the option to seek repayment.
[314]
Investors simply weren't clear about
[316]
whether Evergrande would be able
[318]
to honor those obligations.
[320]
Evergreen turned to the
government and said,
[324]
"Look, we are in serious crisis mode here.
[326]
If we don't get out of this,
[328]
it's going to have a huge ripple effect
[329]
on the whole sector.
[331]
Do we really want that to happen?"
[332]
And that really focused the attention
[334]
of the people who could help them,
[336]
in this case it was the suppliers,
[339]
and they waived their right to be repaid
[342]
because they wanted to ensure
[343]
that Evergrande survived.
[345]
That was just a very short term solution.
[348]
It didn't really get to
the heart of the issue,
[351]
which is that Evergrande's debts were
[353]
arguably becoming unmanageable.
[355]
Evergrande later denied sending a letter
[357]
to the Guangdong government
[359]
in which it warned of a liquidity crisis.
[361]
And in March 2021,
[363]
the company outlined a
plan to cut its debt.
[366]
But just months later,
[368]
concerns over the company's
financial health resurfaced,
[371]
sending some of its bond
prices to record lows
[374]
and its credit ratings
were repeatedly downgraded.
[377]
We've consistently traded Evergrande bonds
[380]
during the last nine months, I'd say.
[383]
It was a bad investment for us
[384]
because we ended up losing money,
[386]
not as much as others,
[387]
because we started by
being short to begin with.
[390]
The losses were not significant.
[393]
Investing in Chinese properties,
[396]
it's complex because you depend a lot
[398]
on government policies,
[400]
and it's very difficult for investors
[402]
to make a call on those policies.
[404]
The firm itself has more than
300 billion in liabilities.
[408]
Now that includes something
of like $19 billion of bonds
[412]
that are owed to offshore
or global investors,
[415]
as well as about $8 billion worth
[417]
of domestic bonds that are owed
[419]
to local investors in mainland China.
[422]
Evergrande is also said to
have private placements,
[426]
which are essentially hidden
[428]
or sort of opaque types of debt
[430]
that have been sold to just
a small group of investors.
[433]
Scrambling to repay its mounting debt,
[435]
the company sold some assets
[437]
and Hui was also asked by the government
[439]
to use his personal wealth to pay debt.
[442]
But none of this offered a quick fix.
[444]
If you just looked at the numbers,
[446]
the amount of debt that Evergrande had,
[449]
and you looked at how much
money was on the books,
[451]
you could tell there was
going to be some trouble.
[456]
Over 1.5 million home buyers have
[458]
partly paid for Evergrande properties,
[460]
but those apartments are not yet built.
[463]
In September 2021,
[465]
over 100 homebuyers in
Guangzhou staged a protest,
[469]
demanding that the company restart
[470]
the halted construction work.
[473]
Missed payments on 40 billion yuan
[475]
of wealth products sold by Evergrande
[477]
to retail investors also sparked
nationwide demonstrations.
[486]
Protests like these
put pressure on Beijing
[489]
to intervene and avoid further unrest.
[491]
Chinese regulators summoned Hui
[493]
and rebuked Evergrande
for its debt problems.
[496]
Evergrande has said it is committed
[498]
to completing the project.
[499]
It's also says it's committed
[500]
to repaying the wealth investors,
[503]
but the jury is still out on that.
[507]
Historically, Hui has been seen to have
[510]
the support of authorities,
[513]
partly because of his contribution
[514]
to broader national efforts,
[516]
to things like building more projects
[518]
and helping boost GDP.
[520]
However, given the crackdown
[522]
that we've seen across China,
[526]
particularly focused on some billionaires,
[528]
it did become clearer that Hui
may not necessarily be able
[533]
to rely on authorities' support
[535]
in the way that he had in the past.
[546]
The crackdown on property
[548]
really figures into that broader theme.
[550]
So the emphasis that property
is not for speculation,
[554]
but it's for living in has been a mantra
[557]
that we've heard time and time again.
[559]
Hui has also relied on a group of friends,
[563]
sometimes refer to "his poker pals".
[566]
So that includes property
mogul, Joseph Lau.
[569]
Over the past few months,
[571]
it's also apparent that some
of Hui's wealthy friends have
[575]
since headed for the exit.
[576]
So selling stakes in the
company, for instance,
[580]
and selling shares.
[581]
It does look like the crisis
that Evergrande is facing is
[585]
really distinctive from previous episodes.
[588]
Mr. Hui, he was, by any
account, a success story,
[592]
but that narrative has
changed quite tremendously.
[598]
After holding out for months
[600]
and meeting debt obligations
at the last minute,
[602]
Evergrande finally defaulted in December
[605]
and inched closer to a debt restructuring.
[608]
Meanwhile, the government of
China's central bank signaled
[611]
that Beijing will not bail out Evergrande.
[614]
This is a market event.
[616]
It should be handled in
a market-oriented way,
[620]
based on law.
[623]
So Evergrande hasn't been
particularly communicative
[626]
through this crisis.
[628]
However, it did release a statement saying
[630]
that it intends to actively
engage with creditors,
[634]
and it also acknowledged
that it may struggle
[636]
to meet some of its debt obligations.
[660]
The provincial government
of Hainan decided
[664]
quite recently that Evergrande's projects
[667]
on their site was not proper, was illegal,
[670]
they didn't have the right permits.
[671]
And so, they've ordered Evergrande
[673]
to demolish dozens of concrete condos
[677]
that were just about ready.
[679]
Just the image of this
wrecking ball coming
[682]
for these condos, which
are almost complete,
[685]
is an metaphor for what's going on
[687]
with Evergrande right now.
[689]
The wrecking ball is coming.
[691]
HNA, the other debt-ridden
Chinese conglomerate,
[694]
might offer a potential
model for Evergrande.
[697]
Local government in Hainan,
[698]
where HNA was based,
[700]
essentially took control of the company,
[702]
sold its assets,
[703]
paid off some of its debt,
[704]
and is still working on the rest.
[707]
The Guangdong government
now has sent a team
[710]
to go in at Evergrande and
help manage this crisis.
[714]
Some people think that the government may
[717]
ultimately take control of the company.
[719]
Now that's still very much up for debate.
[722]
In terms of what happens to Mr. Hui,
[725]
could it be something
similar to Chen Feng,
[728]
the founder, chairman, CEO of HNA?
[732]
It's hard to say.
[733]
Mr. Chen was detained, arrested,
[735]
charged with illegal activities.
[738]
I'm sure that if some
misconduct is revealed,
[741]
the regulators are not going to be shy
[742]
about looking to pin responsibility
[745]
on those behind those decisions.
[753]
Apart from Evergrande,
[754]
more than a dozen Chinese
developers have defaulted.
[758]
Some are worried that the credit crisis
[759]
in China's real estate
sector might spread,
[762]
damaging the country's financial system
[764]
and even the world economy.
[766]
But Chinese authorities
have repeatedly said
[769]
the risk is controllable
[770]
and it would not undermine the market
[772]
in the medium and long run.
[774]
Many, many Chinese families have
[776]
much of their wealth
invested in their apartment.
[778]
And so if you saw a big decline on that,
[781]
you could see people, one,
[782]
losing a lot of their consumption power,
[784]
but two, also people potentially
going onto the street
[788]
and protesting and being really upset.
[790]
And so, that was a major
concern for the government.
[794]
To support the slowing economy
[796]
the government released
a tremendous amount
[798]
of liquidity and cut borrowing costs.
[801]
It also urged banks to
boost real estate lending
[804]
and eased a key debt
restriction for developers.
[807]
There are some investors that will
[809]
probably never touch Chinese bonds again.
[812]
And investors will need to have
[814]
some more level of certainty
[817]
on the rules of the game
[819]
before they start investing again.
[821]
So China's developers are now facing
[824]
a reckoning of sorts.
[826]
They have to shape up
their financial health
[829]
and reduce their leverage
[831]
if they're to continue and prosper.
[834]
From when Mr. Hui started Evergrande
[837]
back in the late 90s until now,
[839]
you could do really well in China
[842]
by just sort of building on top of debt.
[845]
That model is really coming to an end.
[847]
China's changing into something new,
[850]
something we don't really
understand quite yet.
[852]
But what is certain is that
[853]
the old way China used to work is over.
Most Recent Videos:
You can go back to the homepage right here: Homepage