China’s Evergrande Group, once the world’s most indebted property developer, has filed for bankruptcy in New York on Thursday, August 17, 2023. The company, which has more than $300 billion in liabilities, has been struggling to repay its creditors and avoid a default that could trigger a financial crisis in China and beyond. In this article, we will explain the background, the causes, the consequences, and the implications of Evergrande’s bankruptcy.
The Background of Evergrande’s Bankruptcy
Evergrande was founded in 1996 by Xu Jiayin, a former steel factory worker who became one of China’s richest men. The company grew rapidly by taking advantage of China’s urbanization and housing boom, building millions of apartments, villas, hotels, malls, stadiums, and theme parks across the country. Evergrande also diversified into other sectors, such as electric vehicles, health care, sports, media, and tourism.
However, Evergrande’s expansion was fueled by massive borrowing from banks, bondholders, suppliers, contractors, and homebuyers. The company relied on a business model of pre-selling unfinished properties to raise cash and fund new projects. It also offered high interest rates and generous incentives to attract investors and customers. By the end of 2020, Evergrande had accumulated more than $300 billion in total liabilities, making it the world’s most indebted property developer.
Evergrande’s troubles began in 2020, when the Chinese government introduced new regulations to curb the excessive debt and risk in the property sector. The so-called “three red lines” policy limited the leverage ratios of property developers based on their debt-to-asset ratio, debt-to-equity ratio, and cash-to-short-term debt ratio. Evergrande failed to meet any of the three criteria and was barred from borrowing more money or issuing new bonds.
As the Covid-19 pandemic hit the global economy and disrupted the property market, Evergrande faced a liquidity crunch and a cash flow crisis. The company struggled to pay its suppliers, contractors, employees, and investors. It also faced protests from angry homebuyers who demanded refunds or delivery of their delayed properties. Evergrande tried to sell some of its assets and cut costs to raise funds, but it was not enough to cover its huge debt obligations.
In September 2021, Evergrande missed several interest payments on its bonds and loans, triggering fears of a default that could have a domino effect on the financial system. The company sought help from the Chinese government and its creditors to restructure its debt and avoid a collapse. However, no rescue plan or bailout was announced by either party.
In March 2022, Evergrande unveiled a multi-billion dollar restructuring plan to pay off its international creditors. The plan involved swapping some of its offshore bonds for new ones with longer maturities and lower interest rates. It also involved selling some of its domestic assets and equity stakes to local investors. The plan was approved by more than 90% of its offshore bondholders in June 2022.
However, the plan faced legal challenges and opposition from some of its domestic creditors and homebuyers. Some of them filed lawsuits against Evergrande in China and Hong Kong, seeking repayment or compensation. Some of them also staged protests and occupied Evergrande’s offices and sales centers.
In August 2023, Evergrande filed for bankruptcy protection in New York under Chapter 15 of the US Bankruptcy Code. Chapter 15 is a legal provision that allows foreign companies to seek recognition and support for their insolvency or debt-restructuring cases in the US. Evergrande also pursued a parallel “scheme of arrangement” in the Cayman Islands and a restructuring proceeding in Hong Kong.
The Causes of Evergrande’s Bankruptcy
Evergrande’s bankruptcy was caused by a combination of internal and external factors that exposed its unsustainable business model and financial vulnerability. Some of the main causes are:
- Overexpansion: Evergrande overextended itself by expanding too fast and too wide into various sectors and regions without sufficient capital or profitability.
- Overleveraging: Evergrande relied too much on debt to finance its expansion and operations, without generating enough cash flow or profit to repay its creditors. It also offered high interest rates and incentives to attract investors and customers, which increased its liabilities and costs.
- Regulatory tightening: Evergrande faced increasing pressure from the Chinese government, which introduced new rules and measures to curb the excessive debt and risk in the property sector. The “three red lines” policy limited Evergrande’s ability to borrow more money or issue new bonds, while the crackdown on shadow banking and illegal fundraising reduced its sources of funding.
- Covid-19 pandemic: Evergrande was hit hard by the Covid-19 pandemic, which disrupted the global economy and the property market. The pandemic reduced the demand and price of its properties, as well as its income and cash flow. It also delayed its construction and delivery of its projects, which affected its reputation and customer satisfaction.
- Legal disputes: Evergrande faced legal disputes and challenges from some of its domestic creditors and homebuyers, who demanded repayment or compensation for their investments or purchases. Some of them filed lawsuits against Evergrande in China and Hong Kong, while others staged protests and occupied its offices and sales centers.
- The Consequences of Evergrande’s Bankruptcy
- Evergrande’s bankruptcy has significant consequences for both the company and the wider economy. Some of them are:
- Losses for creditors and investors: Evergrande’s bankruptcy will result in losses for its creditors and investors, who may not be able to recover their money or assets. According to its restructuring plan, Evergrande will offer its offshore bondholders new bonds with longer maturities and lower interest rates, which will reduce their value and returns. It will also sell some of its domestic assets and equity stakes to local investors, who may face uncertainty and risk in their investments.
- Impact on the property sector: Evergrande’s bankruptcy will have a negative impact on the property sector, which is a key driver of China’s economic growth. Evergrande’s collapse may cause a decline in property prices, sales, and construction, as well as a loss of confidence and trust in the market. It may also affect other property developers, who may face similar liquidity and debt problems, or competition from Evergrande’s asset sales.
- Spillover effects on the financial system: Evergrande’s bankruptcy may have spillover effects on the financial system, both in China and abroad. Evergrande’s default may trigger a chain reaction of defaults and contagion among its lenders, suppliers, contractors, and customers, who may face solvency or liquidity issues. It may also cause volatility and instability in the financial markets, especially in the bond market, where Evergrande has issued billions of dollars worth of debt. It may also affect the exchange rate and foreign reserves of China, as well as the global supply chain and trade.
- Social unrest and discontent: Evergrande’s bankruptcy may cause social unrest and discontent among its employees, homebuyers, investors, and creditors, who may lose their jobs, homes, savings, or investments. Some of them may resort to protests, violence, or legal action to express their anger or frustration. Some of them may also blame the government or demand its intervention or assistance.
The Implications of Evergrande’s Bankruptcy
Evergrande’s bankruptcy has important implications for both China and the world. Some of them are:
- A test for China’s economic resilience and reform: Evergrande’s bankruptcy is a test for China’s economic resilience and reform, as it challenges its ability to manage its debt and risk problems, maintain its growth and stability, and balance its social and environmental goals. Evergrande’s bankruptcy may also force China to accelerate its structural reforms, such as deleveraging, opening up, and innovation, to improve its economic efficiency and competitiveness.
- A signal for the global economic recovery and outlook: Evergrande’s bankruptcy is a signal for the global economic recovery and outlook, as it reflects the impact of the Covid-19 pandemic and the policy responses on the global economy and the financial markets. Evergrande’s bankruptcy may also affect the global economic growth and trade, as well as the confidence and sentiment of investors, consumers, and businesses.
- A lesson for the international financial system and governance: Evergrande’s bankruptcy is a lesson for the international financial system and governance, as it exposes the vulnerabilities and gaps in the global financial regulation, supervision, and cooperation. Evergrande’s bankruptcy may also prompt the international community to enhance its financial coordination and collaboration, as well as its crisis prevention and resolution mechanisms.
Q: What is Evergrande?
A: Evergrande is a Chinese property developer that was once the world’s most indebted company. It has more than $300 billion in liabilities and has filed for bankruptcy in New York.
Q: Why did Evergrande go bankrupt?
A: Evergrande went bankrupt because it overexpanded, overleveraged, faced regulatory tightening, suffered from the Covid-19 pandemic, and encountered legal disputes.
Q: How does Evergrande’s bankruptcy affect China?
A: Evergrande’s bankruptcy affects China’s economy, property sector, financial system, social stability, and policy reform.
Q: How does Evergrande’s bankruptcy affect the world?
A: Evergrande’s bankruptcy affects the world’s economic recovery, outlook, trade, financial markets, system, and governance.