So Evergrande is this sprawling giant
of a real estate developer.
As recently as 2016,
it was the largest real estate developer
in China by sales.
Evergrande is also the world's most indebted developer.
The firm has more than 300 billion in liabilities,
and it may actually be on the hook for more debt,
which isn't necessarily revealed
on its balance sheet.
Evergrande, once one of China's
most successful developers,
has struggled to pay its debt for months.
And its liquidity scares unsettled
the global markets.
It's been a volatile week for Evergrande to say the least.
Recently, there has been
too much bad news surrounding this name.
The battle for survival is intensifying.
In December,
Evergrande failed to pay two dollar bond coupons
and was officially declared a defaulter
for the first time.
Evergrande is prepared to enter
a formal debt restructuring process,
which would be one of China's largest
and most complex.
China Evergrande is Beijing's biggest worry right now.
And it's not just about Evergrande,
it's the spill over into the rest of the property sector,
into the economy more broadly.
This final resolution for Evergrande is
just getting started.
It really marks the end of an old chapter,
the start of a new chapter for China.
The chairman, Mr Hui,
he came from really stark poverty.
He was born in the late 1950s in Henan province,
which is a major rural, agricultural province
in the middle of China.
And all he wanted to do was
to get out of his village.
He did that by getting into universities.
He went to college, he studied metallurgy.
And in the late 1990s,
he started Evergrande,
and got into real estate development.
And in the two decades after that,
he built it into this gigantic real estate company.
Hui is seen, over the past two decades,
to have been particularly savvy about
how he has expanded his business;
aligning his investments
and his growth and expansion into property
alongside the agenda of authorities.
He was able to grow the company so quickly
and into such a tremendous size
because in the background
China's economy was booming.
China was trying to make room
for hundreds of millions of people moving
from the countryside into the cities.
That was fueling a boom in demand
for property, for homes, for apartments.
At the same time,
as the result of the financial crisis in 2008,
China introduced this massive stimulus package
that flooded the economy with money
and made lending very easy, very cheap.
The company was able to translate
some of its landholdings,
use that as collateral for loans,
and then help it get control of more land.
And then, to get more loans,
and it was a cycle that went like that.
Through massive borrowing,
today Evergrande has become a sprawling conglomerate
that controls land five times the size of Manhattan
and owns more than 1,300 real estate projects
in 280 cities.
It has businesses in new energy vehicles,
and historically also has invested in football companies
and even bottled water.
But as Chinese President Xi Jinping began
to control financial risks in the country's economy,
Hui's debt-fueled expansion strategy was called
into question.
Starting in late 2015 and '16,
there was this greater emphasis on curbing
the amount of debt in the Chinese system.
By lots of different measurements
there is a tremendous amount of debt in China.
It's not just the amount of debt that China has,
it's the pace at which it's accumulated that debt.
There is a real concern.
If Chinese companies borrow a lot of money
and build bridges to nowhere,
roads that people don't use,
homes that no one wants to live in,
then that money is wasted
and when they have to pay it back,
there's not going to be any money there
to pay it back with,
and that is going to mire the economy.
A big part of the debt problem lies
in China's real estate sector,
which accounts for about 30% of
the country's dollar-denominated bonds.
To curb reckless borrowing,
in 2020, Chinese authorities drafted
three red lines-
metrics regarding debt that developers will have to meet
if they want to borrow more.
In September 2020, Evergrande faced a liquidity scare.
And people were very concerned
about a credit crunch at the firm.
That was because a group of strategic investors had
the option to seek repayment.
Investors simply weren't clear about
whether Evergrande would be able
to honor those obligations.
Evergreen turned to the government and said,
"Look, we are in serious crisis mode here.
If we don't get out of this,
it's going to have a huge ripple effect
on the whole sector.
Do we really want that to happen?"
And that really focused the attention
of the people who could help them,
in this case it was the suppliers,
and they waived their right to be repaid
because they wanted to ensure
that Evergrande survived.
That was just a very short term solution.
It didn't really get to the heart of the issue,
which is that Evergrande's debts were
arguably becoming unmanageable.
Evergrande later denied sending a letter
to the Guangdong government
in which it warned of a liquidity crisis.
And in March 2021,
the company outlined a plan to cut its debt.
But just months later,
concerns over the company's financial health resurfaced,
sending some of its bond prices to record lows
and its credit ratings were repeatedly downgraded.
We've consistently traded Evergrande bonds
during the last nine months, I'd say.
It was a bad investment for us
because we ended up losing money,
not as much as others,
because we started by being short to begin with.
The losses were not significant.
Investing in Chinese properties,
it's complex because you depend a lot
on government policies,
and it's very difficult for investors
to make a call on those policies.
The firm itself has more than 300 billion in liabilities.
Now that includes something of like $19 billion of bonds
that are owed to offshore or global investors,
as well as about $8 billion worth
of domestic bonds that are owed
to local investors in mainland China.
Evergrande is also said to have private placements,
which are essentially hidden
or sort of opaque types of debt
that have been sold to just a small group of investors.
Scrambling to repay its mounting debt,
the company sold some assets
and Hui was also asked by the government
to use his personal wealth to pay debt.
But none of this offered a quick fix.
If you just looked at the numbers,
the amount of debt that Evergrande had,
and you looked at how much money was on the books,
you could tell there was going to be some trouble.
Over 1.5 million home buyers have
partly paid for Evergrande properties,
but those apartments are not yet built.
In September 2021,
over 100 homebuyers in Guangzhou staged a protest,
demanding that the company restart
the halted construction work.
Missed payments on 40 billion yuan
of wealth products sold by Evergrande
to retail investors also sparked nationwide demonstrations.
Protests like these put pressure on Beijing
to intervene and avoid further unrest.
Chinese regulators summoned Hui
and rebuked Evergrande for its debt problems.
Evergrande has said it is committed
to completing the project.
It's also says it's committed
to repaying the wealth investors,
but the jury is still out on that.
Historically, Hui has been seen to have
the support of authorities,
partly because of his contribution
to broader national efforts,
to things like building more projects
and helping boost GDP.
However, given the crackdown
that we've seen across China,
particularly focused on some billionaires,
it did become clearer that Hui may not necessarily be able
to rely on authorities' support
in the way that he had in the past.
The crackdown on property
really figures into that broader theme.
So the emphasis that property is not for speculation,
but it's for living in has been a mantra
that we've heard time and time again.
Hui has also relied on a group of friends,
sometimes refer to "his poker pals".
So that includes property mogul, Joseph Lau.
Over the past few months,
it's also apparent that some of Hui's wealthy friends have
since headed for the exit.
So selling stakes in the company, for instance,
and selling shares.
It does look like the crisis that Evergrande is facing is
really distinctive from previous episodes.
Mr. Hui, he was, by any account, a success story,
but that narrative has changed quite tremendously.
After holding out for months
and meeting debt obligations at the last minute,
Evergrande finally defaulted in December
and inched closer to a debt restructuring.
Meanwhile, the government of China's central bank signaled
that Beijing will not bail out Evergrande.
This is a market event.
It should be handled in a market-oriented way,
based on law.
So Evergrande hasn't been particularly communicative
through this crisis.
However, it did release a statement saying
that it intends to actively engage with creditors,
and it also acknowledged that it may struggle
to meet some of its debt obligations.
The provincial government of Hainan decided
quite recently that Evergrande's projects
on their site was not proper, was illegal,
they didn't have the right permits.
And so, they've ordered Evergrande
to demolish dozens of concrete condos
that were just about ready.
Just the image of this wrecking ball coming
for these condos, which are almost complete,
is an metaphor for what's going on
with Evergrande right now.
The wrecking ball is coming.
HNA, the other debt-ridden Chinese conglomerate,
might offer a potential model for Evergrande.
Local government in Hainan,
where HNA was based,
essentially took control of the company,
sold its assets,
paid off some of its debt,
and is still working on the rest.
The Guangdong government now has sent a team
to go in at Evergrande and help manage this crisis.
Some people think that the government may
ultimately take control of the company.
Now that's still very much up for debate.
In terms of what happens to Mr. Hui,
could it be something similar to Chen Feng,
the founder, chairman, CEO of HNA?
It's hard to say.
Mr. Chen was detained, arrested,
charged with illegal activities.
I'm sure that if some misconduct is revealed,
the regulators are not going to be shy
about looking to pin responsibility
on those behind those decisions.
Apart from Evergrande,
more than a dozen Chinese developers have defaulted.
Some are worried that the credit crisis
in China's real estate sector might spread,
damaging the country's financial system
and even the world economy.
But Chinese authorities have repeatedly said
the risk is controllable
and it would not undermine the market
in the medium and long run.
Many, many Chinese families have
much of their wealth invested in their apartment.
And so if you saw a big decline on that,
you could see people, one,
losing a lot of their consumption power,
but two, also people potentially going onto the street
and protesting and being really upset.
And so, that was a major concern for the government.
To support the slowing economy
the government released a tremendous amount
of liquidity and cut borrowing costs.
It also urged banks to boost real estate lending
and eased a key debt restriction for developers.
There are some investors that will
probably never touch Chinese bonds again.
And investors will need to have
some more level of certainty
on the rules of the game
before they start investing again.
So China's developers are now facing
a reckoning of sorts.
They have to shape up their financial health
and reduce their leverage
if they're to continue and prosper.
From when Mr. Hui started Evergrande
back in the late 90s until now,
you could do really well in China
by just sort of building on top of debt.
That model is really coming to an end.
China's changing into something new,
something we don't really understand quite yet.
But what is certain is that
the old way China used to work is over.