Evergrande was known for decades as one of China’s most successful real estate developers, however, as China’s economy struggled within the past few years, the developer acquired debt, leading to their bankruptcy in the US.
The demand for housing in China was so strong that builders would pre-sell apartment units before they completed construction. Shifts in policies in China within the last two years have also left property developers without a lot of money, leading to a lot of risky financial decisions.
In 2021, the central government tried to curb excessive borrowing to slow the rise of home prices, which led to the removal of funding for property developers. Evergrande acquired $300 billion in liabilities, which it wasn’t able to pay, leading to market panic.
Building and construction was then suspended for dozens of projects, leading to many buyers who pre-purchased housing with no new home and a mountain of debt.
Evergrande filed for Chapter 15 bankruptcy last Thursday, which is a way for foreign companies to utilize US bankruptcy laws to restructure their debt, which takes time and Evergrande has around $19 billion in offshore debts.
The next step for the developer will be to restructure those billions of dollars in offshore debts which could have a major impact on the financial system in China.
Other large builders and developers in China have also been struggling to cope with the now low demand for housing.
China’s property and housing market accounts for around 30% of the nation’s economic activity, as well as two-thirds of general household wealth.
The “zero Covid” strategy in China has also hindered its economic growth, leaving many potential buyers skeptical when it comes to buying new homes and investing in real estate in general. Unemployment levels are also on the rise while property values fall.
Beijing has worked to increase demand for housing and provide cash for developers in need, however, it’s not nearly enough, and state-funded bailouts seem to be on a massive decline in general.
“We must maintain historic patience and insist on making steady, step-by-step progress,” President Xi Jinping said in a recent speech.
Eric Mastrota is a Contributing Editor at The National Digest based in New York. A graduate of SUNY New Paltz, he reports on world news, culture, and lifestyle. You can reach him at firstname.lastname@example.org.