China’s Evergrande, one of the world’s most indebted property developers, has sought bankruptcy protection in the United States. This move comes as the company attempts to restructure its massive debts with international creditors. Evergrande’s default on its dollar-denominated debts last year triggered a liquidity crisis in the real estate sector, impacting China’s overall economic growth and placing pressure on policymakers in Beijing. The company currently has approximately $19 billion in overseas liabilities.
Adding to the concerns in the property sector, fellow developer Country Garden, which was previously considered relatively safe compared to its highly-leveraged peers, also missed payments on its international debts this month. Investment group Zhongrong faced a similar situation with failed repayments on savings products. These incidents have reignited worries about a slowdown in the real estate market, which typically accounts for over a quarter of China’s economic activity. The turmoil in the sector now threatens to spill over into other areas of the economy, compounding challenges such as deflation, weak exports, and high youth unemployment that Beijing is already grappling with.
Evergrande, with liabilities totaling $340 billion, reported losses of $81 billion for 2021 and 2022. In its bankruptcy filing in a New York court, the company is relying on the Chapter 15 process, which allows foreign firms to seek recognition of their restructuring in the US. The company is expected to hold meetings with creditors in Hong Kong to discuss the restructuring plan proposed in March.
Since Evergrande’s collapse, numerous Chinese developers have faced debt defaults. So far, Beijing has refrained from implementing a major bailout or stimulus package and has instead focused on completing unfinished projects. The Chinese government initiated a deleveraging campaign in 2020 to prevent overheating in housing prices. However, the missed payments from Zhongrong, a significant player in the trust industry that channels trillions of renminbi into various investments, have raised concerns about the shadow finance sector’s exposure to the struggling property market. Last May, Zhongrong filed a lawsuit against Evergrande over a 1.9 billion RMB ($260 million) investment, according to Evergrande’s corporate bond filings.
Recent data has also shown a decline in new home prices in China, prompting further worry about the state of the real estate sector. Amidst these challenges, investors and economists are closely monitoring how the Chinese government will respond to stabilize the situation and prevent potential spillover effects on the wider economy.
Overall, the bankruptcy filing by China Evergrande and the wave of defaults in the real estate sector have caused significant economic concerns. The future of China’s property market and its potential impact on the broader economy remain uncertain, making it a critical issue that demands attention from policymakers and investors alike.
