Evergrande China: How the property giant collapsed

Last week, shares in heavily indebted China Evergrande Group were taken off the Hong Kong Stock Exchange, capping a grim reversal of fortune for the once-booming property developer. It failed to meet a July deadline to resume trading. A Hong Kong court issued a winding-up order for Evergrande in January 2024, ruling that the company had failed to come up with a suitable debt repayment plan. Liquidators have made moves to recover creditors’ investments, including filing a lawsuit against PwC and its mainland Chinese arm for their role in auditing the debt-ridden developer. This is a sad story involving China’s biggest real estate firm, Evergrande, that at its peak was worth more than $50 billion and helped propel China’s rapid economic growth in recent decades.

The government’s all-time stance was to avoid moral hazard by not encouraging reckless borrowing or risky behaviour through unconditional bailouts. Government’s interventions post collapse, were targeted and limited, focusing on ensuring delivery of homes rather than rescuing Evergrande as a whole. One may ask, have this bankruptcy affected European business including banks. The answer is that while European banks had limited direct exposure to Evergrande’s debt, the collapse contributed to increased market volatility, risk aversion, and a reassessment of emerging market risks. The crisis indirectly affected European financial institutions through investor losses, market sentiment shifts, and broader economic impacts linked to China’s economic slowdown. However, the overall direct financial impact on European banks was relatively contained compared to Chinese and regional institutions. What is the growth pattern of Evergrande as a major property developer? It aggressively expanded by borrowing heavily to finance rapid growth and large-scale property developments. In 2020, the Chinese government introduced the “three red lines” policy to curb excessive borrowing by property developers.

The policy set limits on debt ratios, restricting companies from taking on more debt if they exceeded certain thresholds. Evergrande failed to meet these requirements, as these limited its ability to refinance or raise new capital, exacerbating its liquidity crisis. China’s property market began to cool due to government measures aimed at preventing bubbles and start promoting more sustainable growth. Declining property sales and falling prices reduced Evergrande’s cash flow from new projects and sales, making it harder to service debt. This financial collapse underscored the risks associated with pre-selling properties before completion, a common practice in China’s real estate market.

The government has recently emphasized the need for more stringent oversight and protections for homebuyers. Many Chinese homebuyers were left in precarious situations due to Evergrande’s collapse, facing unfinished homes, financial losses, and emotional distress. Government timely intervention helped mitigate some impacts by pushing for project completions, but the crisis exposed significant vulnerabilities in China’s property market and consumer protection frameworks. The experience has prompted calls for reforms to better protect homebuyers and ensure more sustainable real estate practices. By 2021, Evergrande defaulted in paying creditors after the company had amassed over $300 billion in liabilities, making it one of the most indebted companies globally. This high leverage made it vulnerable to any downturn or tightening of credit conditions.

One asks: - what is the remedy for buyers in China who made initial deposits on their future home. Thousands of homebuyers who had already paid deposits or made substantial payments found their homes unfinished or construction halted indefinitely. In many cases, buyers were left in limbo, unable to move into their new homes as promised. Such an army of homebuyers had committed large sums of money upfront, often through mortgages or personal savings. Consumer protection mechanisms were found weak, as calls for stronger regulations to safeguard homebuyers in future real estate transactions. With the company’s financial collapse, there was uncertainty about whether these payments would be refunded or if the homes would ever be delivered.

The inability to secure promised housing caused significant stress, anxiety, and financial hardship for affected families. The crisis raised concerns about social stability, especially in cities where large numbers of buyers were impacted. Readers may ask what did China do to mitigate the suffering. It intervened to manage the crisis, prioritizing the completion of key housing projects to protect homebuyers and maintain social stability. The government also encouraged restructuring plans aimed at ensuring that homebuyers would eventually receive their homes, even if ownership or management changed hands. In summary, Chinese authorities did not provide immediate or large-scale rescue funds to Evergrande, but this was a deliberate policy choice rather than a delay.

 The government prioritized an orderly restructuring, risk containment, and protecting homebuyers through targeted interventions rather than bailing out the company outright. This approach reflects China’s broader efforts to reduce financial risks and promote more sustainable growth in the property sector. Since 2024, the government sought to balance financial stability with the need to reform the property sector and curb excessive borrowing.