Will Beijing save Evergrande?
The author is a Beijing correspondent of the JoongAng Ilbo.
The latest hot topic in China is real estate developer Evergrande Group’s possible bankruptcy. In the Hong Kong Stock Exchange, Evergrande’s share price plunged by 10.24 percentage points last Monday. The stock price fell from 10,800 yuan ($1,670) on June 23 to 2,280 yuan, down by 80 percent in just three months.
According to the group’s financial report, it has a total debt of 1.97 trillion yuan, of which 240 billion yuan — three times its 86.8 billion yuan cash holdings — should be repaid within a year. The rumors of crisis heightened as two of its subsidiaries failed to pay back their debts of 943 million yuan on Sept. 8. Foreign media reported that an international financial crisis like the Lehman Brothers crisis in 2008 may be on the horizon.
But what I actually feel in China is rather different. I visited an apartment under construction by Evergrande near Beijing Capital International Airport on Sept. 22. Contrary to my expectations, the construction of the apartment, to be completed in 2023, was in progress. I asked whether its construction or sales have been affected.
According to a person in charge of financial affairs, clients looking to buy actually increased after the rumors of crisis spread. Bloomberg News reported on Sept. 20 that Evergrande started selling assets to secure liquidity, selling at a price discounted by as much as 48 percent. But at another site, construction came to a halt. A customer who is supposed to live in the apartment said, “I cannot sleep at night due to growing concerns about the company.”
The Chinese government, which is surely aware of the possible impact of the bankruptcy of the builder, hasn’t taken any action. In a press conference by the State Council on Sept. 15, spokesman Fu Linghui was asked about the risk of Evergrande’s default and said, “As some major real estate developers are in trouble, we need to observe the impact on the industry.” But he added, “The real estate market is generally stable as Beijing has maintained the principle of banning housing speculation since early 2021.” He suggested that the authorities have no intention to intervene as they are satisfied with the current real estate situation.
Evergrande’s debt soared by 1.36 trillion yuan in five years as a result of increasing short-term borrowing for leverage. As the Chinese government wants to stabilize the real estate market to promote common prosperity, can Evergrande be rescued? “Observation” may be a warning to other real estate developers and speculators and investors.