Every once in a while a company grows so big and messy that governments fear what would happen to the broader economy if it were to fail. In China, Evergrande, a sprawling real estate developer, is that company.<\/p>\n
Evergrande has the distinction of being the world\u2019s most debt-saddled property developer and has been on life support for months. A steady drumbeat of bad news in the recent weeks has accelerated what many experts warn is inevitable: failure.<\/p>\n
The ratings agency Fitch said this week that default \u201cappears probable.\u201d Moody\u2019s, another ratings agency, said Evergrande is out of cash and time. Evergrande is faced with more than $300 billion in debt, hundreds of unfinished residential buildings, and angry suppliers who have shut down construction sites. The company has even started to pay overdue bills by handing over unfinished properties.<\/p>\n
Observers are watching to see if Chinese regulators make good on their pledge to clean up the country\u2019s corporate sector by letting \u201cdebt bombs\u201d like Evergrande collapse.<\/p>\n
In its glory days a decade ago, Evergrande sold bottled water, owned China\u2019s best professional soccer team and even briefly dabbled in pig farming. It became so big and sprawling that it even has <\/strong>a unit that makes electric cars, though it has delayed mass production.<\/p>\n Today, Evergrande is seen as a rickety threat to China\u2019s biggest banks.<\/p>\n The company, which was founded in 1996, rode China\u2019s epic property boom that urbanized large swathes of the country and resulted in nearly three quarters of household wealth being tied up in housing. This put Evergrande at the center of power in an economy that came to lean on the property market for supercharged economic growth.<\/p>\n Its billionaire founder, Xu Jiayin, is a member of the Chinese People\u2019s Political Consultative Conference, an elite group of politically well-connected advisers. Mr. Xu\u2019s connections probably gave creditors more confidence to keep lending money to Evergrande as it grew and expanded into new businesses. Eventually, though, Evergrande ended up with more debt than it could pay off.<\/p>\n In recent years, it has faced lawsuits from home buyers who are still waiting for the completion of apartments they partially paid for. Suppliers and creditors have claimed hundreds of billions of dollar in outstanding bills. Some have suspended construction on Evergrande projects.<\/p>\n Evergrande might have been able to keep going if it weren\u2019t for two problems. First, Chinese regulators are cracking down on the reckless borrowing habits of property developers. This has forced Evergrande to start selling off some of its sprawling business empire. That\u2019s not going so well. It has yet to sell its electric vehicle business, despite talks with prospective buyers. Some experts say buyers are waiting for a fire sale.<\/p>\n Second, China\u2019s property market is slowing and there is less demand for new apartments. This week the National Institution for Finance and Development, a prominent Beijing think tank, declared the property market boom \u201chas shown signs of a turning point,\u201d citing weak demand and slowing sales data.<\/p>\n Much of the cash that Evergrande has been able to drum up has come from presold apartments that aren\u2019t yet completed. Evergrande has nearly 800 projects across China that are unfinished, and as many as 1.2 million people who are still waiting to move into their new homes, according to research from REDD Intelligence.<\/p>\n Evergrande has slashed prices on new apartments but even that has failed to entice new buyers. In August it made a quarter fewer sales in than it did a year ago. <\/p>\n Beijing will be tempted to say \u201cno,\u201d but a collapse could cause serious damage, leaving homeowners, suppliers and domestic investors \u2014 potentially numbering in the millions \u2014 unhappy. And Beijing has ultimately moved to shore up other large companies with big problems in the past.<\/p>\n For years many investors gave money to companies like Evergrande because they believed that, at the end of the day, Beijing would always step in to rescue it if things got too shaky. And for decades, the investors have been right. But over the past several years, the authorities have shown greater willingness to let companies fail in order to rein in China\u2019s unsustainable debt problem.<\/p>\n The authorities hauled Evergrande executives into a meeting last month and told them to get its debt in order. They have also continued to tell its banks to scale back their lending to the developer.<\/p>\n A campaign by the central bank to tame property debt and reduce the banking sector\u2019s exposure to troubled developers should mean that an Evergrande failure would have less of an impact on China\u2019s financial system.<\/p>\n The reality may be more complicated.<\/p>\n Panic from investors and home buyers could spill over into the property market and hit prices, affecting household wealth and confidence. It could also shake global financial markets and make it harder for other Chinese companies to continue to finance their businesses with foreign investment. Writing in The Financial Times last week, the billionaire investor George Soros warned that an Evergrande default could cause China\u2019s economy to crash.<\/p>\n Chen Zhiwu, a professor of finance at the University of Hong Kong, said a failure could result in a credit crunch for the entire economy as financial institutions become more risk averse. An Evergrande failure, he added, was \u201cnot good news to the financial system or the overall economy.\u201d<\/p>\n Not everyone is as pessimistic. Bruce Pang, an economist at China Renaissance Securities, said a default could lay the groundwork for a healthier economy in the future. \u201cIf Evergrande were to fail with the fading belief of \u2018too big to fail,\u2019 it will prove Beijing\u2019s more tolerance for defaults despite pains and disruption in the short term,\u201d said Mr. Pang.<\/p>\n Foreign investors are owed $7.4 billion in bond payments from Evergrande next year alone. At various points this year they have panicked, sending trading of the bonds in the secondary market to new depths. Over the past week, Evergrande bond notes were going for 50 cents on the dollar. Trading in its debt was so frenzied at one point that regulators briefly put a stop to trading.<\/p>\n The company\u2019s main share listing in Hong Kong has lost more than three-quarters of its value over the past year.<\/p>\n The foreign investors are worried that if Evergrande fails, all the money they are owed will vanish into thin air. The authorities in Beijing have indicated that they are no longer willing to bail out foreign and domestic bondholders. In any bankruptcy proceeding, they would be low on the list of creditors to get any of the Chinese company\u2019s assets.<\/p>\nWhy is the company in so much trouble now?<\/strong><\/span><\/h3>\n
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Will Chinese regulators step in to save it?<\/strong><\/span><\/h3>\n
How would Evergrande\u2019s failure affect China\u2019s economy?<\/strong><\/span><\/h3>\n
Should foreign investors be concerned?<\/strong><\/span><\/h3>\n