Evergrande: restructuring amid worsening crisis is Neverland fantasy

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China Evergrande was once China’s largest property developer. It is still the most indebted. The company’s default initiated the country’s current property crisis.

It has pledged to restructure. But this means little when the entire real estate sector is going through a crisis that threatens broader Chinese financial stability.

On Thursday, Evergrande applied for Chapter 15 bankruptcy protection in New York. Restructuring proceedings are under way in Hong Kong and the Cayman Islands too. 

Evergrande is seeking breathing space. But the group has announced restructurings many times before. Since it defaulted on dollar-denominated debts in 2021, the business environment has deteriorated.

Aggressive policy easing by the People’s Bank of China has failed to slow the slide. Country Garden, the country’s largest and previously healthiest developer, is nearing its first default.

Home prices in China have dropped for two years. This diminishes the incentive for homebuyers to continue paying mortgages on unfinished dwellings.

Homebuyers in more than 100 cities reportedly halted mortgage payments last year. Prices have fallen further since then. If more people stop paying their debts, it could trigger a catastrophic chain reaction for local developers and banks. More than $200bn in estimated mortgage loans are backed by unfinished homes.

The historic scale of this crisis, which includes Evergrande’s liabilities of more than $300bn and losses of $80bn for 2021 and 2022, would usually prompt more aggressive support from the Chinese government.

Beijing is in no position to bail out its developers or its banks. Official data has posted large misses in recent months. The economy is deteriorating faster than expected.

On Friday, the central bank delivered its strongest pushback so far against the weakening renminbi by fixing its daily reference rate. This shows how bad the situation has become. The prognosis for Evergrande and the wider Chinese property sector is dire.

The Lex team is interested in hearing more from readers. Please tell us what you think of the Chinese property crisis in the comments section below