Speaker 1: Broadcasting from the financial capital of the world Bloomberg eleven
Speaker 1: Frio in New York to Washington, d C. Bloomberg to Boston,
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Speaker 1: dot Com. This is Bloomberg Business Week. I'm Carol Masser
Speaker 1: and I'm Tim Stunnobek the international cover this week. China,
Speaker 1: Evergrand grew until recently, the world's largest property developer, is
Speaker 1: buckling under three billion dollars in liabilities, and financial markets
Speaker 1: are bracing for potential aftershocks. Evergrand's troubles are partly a
Speaker 1: familiar tale, but its situation also reflects deliberate policy choices
Speaker 1: made by the ruling Communist Party under President Ji Jimping.
Speaker 1: Like the tech giants Ali Baba in ten Cent, which
Speaker 1: were the targets of sudden regulatory crackdowns this summer, Evergrand
Speaker 1: managed to find itself in the way of the party's priorities.
Speaker 1: Too Big may still fail as developer Evergrand faces a
Speaker 1: debt crunch, China tries to depend less on real Estate
Speaker 1: by Bloomberg News. Sunny Peninsula, a seaside development in the
Speaker 1: southern Chinese city of Guangzhou, was supposed to house five
Speaker 1: thousand families in dozens of towers spread across an area
Speaker 1: the size of thirty soccer fields. Many of the buyers
Speaker 1: were white collar workers, benefiting from the fastest urbanization in
Speaker 1: human history, but the project now looks more like the
Speaker 1: set of a disaster movie. Half finished apartment blocks stand
Speaker 1: empty and abandoned, untouched for months in the humid summer weather.
Speaker 1: Piles of rebar and steel beams are accumulating coatings of rust.
Speaker 1: China Evergrand Group, until recently, the world's largest property developer,
Speaker 1: owns dozens of stalled sites like Sunny Peninsula across China.
Speaker 1: Buckling under more than three hundred billion dollars in liabilities,
Speaker 1: the company is close to collapse, leaving one point five
Speaker 1: million buyers waiting for finished homes. The global financial markets
Speaker 1: are bracing for potential aftershocks. Evergrand is China's largest issuer
Speaker 1: of high yield dollar denominated bonds and bills, are coming
Speaker 1: due to an array of banks and suppliers. Given its
Speaker 1: footprint in the housing market, there's also a risk of
Speaker 1: a disorderly collapse triggering a broader decline in property prices,
Speaker 1: bad news in an economy where twenty seven percent of
Speaker 1: loans are for real estate. The stress isn't only being
Speaker 1: felt in bankers offices. Earlier this month, HomeBuyer surrounded a
Speaker 1: government office in guang Zou to demand construction be restarted
Speaker 1: on their apartments, and unconfirmed videos circulating on social media
Speaker 1: depict similar protests in other cities. Furious retail investors who
Speaker 1: helped fund Evergrand's expansion have turned up at the company's
Speaker 1: Shunjun headquarters to complain about delayed repayments on wealth management
Speaker 1: products it's sold. Evergrand's troubles are partly a familiar tale
Speaker 1: of an overextended, systemically important company taxing its creditor's patients.
Speaker 1: That alone would make it a test for Chinese authorities,
Speaker 1: but its situation also reflects deliberate policy choices made by
Speaker 1: the ruling Communist Party under President Shi Xin Ping, like
Speaker 1: the tech giants Ali Baba Group and ten Scent Holdings,
Speaker 1: which were the targets of sudden regulatory crackdowns that wiped
Speaker 1: out tens of billions of dollars in market value. This summer,
Speaker 1: evergrand found itself in the way of the party's priorities.
Speaker 1: For several years, officials have been taking steps to cool
Speaker 1: real estate prices, which they see as a potential source
Speaker 1: of risk, and signaling that they expect both house price
Speaker 1: growth and new construction to remain roughly flat. In the
Speaker 1: central government, the view has shifted over how much China's
Speaker 1: economy can depend on the housing market, says Ju Ning,
Speaker 1: a former adviser to China's Central Bank. Instead, Beijing wants
Speaker 1: to steer China's economic resources toward areas it views as
Speaker 1: more central to national security, above all, high tech manufacturing
Speaker 1: that can help it reduce its reliance on the U
Speaker 1: S and its allies. The party is so emphasizing financial
Speaker 1: and social stability over sheer growth. Leaders speak of the
Speaker 1: goals of moderate prosperity and common prosperity, and households accumulating
Speaker 1: more debt to buy multiple or more luxurious homes doesn't
Speaker 1: necessarily fit with that vision, nor does the wealth inequality
Speaker 1: that property booms can create. She's pledges to cut pollution
Speaker 1: and carbon emissions also require curbing construction. China may be
Speaker 1: willing to let Evergrand fail if it thinks it can
Speaker 1: engineer a soft landing for the real estate sector. The
Speaker 1: fifty six trillion dollar domestic financial system is dominated by
Speaker 1: state owned lenders, which give the government extensive power both
Speaker 1: to squeeze borrowers and to manage the impact of defaults,
Speaker 1: but the stakes are enormous when industries such as construction
Speaker 1: and property services are included. Real estate accounts for at
Speaker 1: least fifteen percent of the nation's gross domestic product, and
Speaker 1: more than seventy percent of urban China's wealth is stored
Speaker 1: in housing. Countries such as Australia, Brazil and Zambia depend
Speaker 1: on China's relentless demand for steel, copper, and other construction materials,
Speaker 1: and US and European companies increasingly looked to its consumer
Speaker 1: market for growth. In When China created a nationwide housing
Speaker 1: market after tightly restricting private sales for decades, only a
Speaker 1: third of its people lived in towns and cities. Now
Speaker 1: almost two thirds do, increasing the urban population by four
Speaker 1: hundred and eighty million. The homes they've moved into are
Speaker 1: modestly sized by developed world standards, averaging less than forty
Speaker 1: square meters or about four hundred and thirty one square
Speaker 1: feet per person, but about nine of urban residents owned
Speaker 1: those homes, worth more than fifty trillion dollars in total.
Speaker 1: According to Goldman Sachs, this is the wave ever Grand Road.
Speaker 1: Its founder and chairman, Hui Kayan, was born into grinding
Speaker 1: poverty in the central province of Henan in eight In school,
Speaker 1: all I eight was sweet potato and steamed bread. He
Speaker 1: said in a rare speech in twenty eighteen, I really
Speaker 1: hoped I could leave the village. He found his ticket
Speaker 1: out by becoming one of a tiny number of rural
Speaker 1: students to pass the university entrance exam, going on to
Speaker 1: study metallurgy. In nineteen ninety two, we came to Shunjin,
Speaker 1: then a small town on the border with Hong Kong.
Speaker 1: After working as an importer or exporter, he dove into
Speaker 1: the property market, founding Evergrand in ninety seven. By twenty sixteen,
Speaker 1: it was China's biggest property developer by sales. Everything for
Speaker 1: me and Evergrand is given by the Party, the state,
Speaker 1: and society, he said in his twenty eighteen speech, even
Speaker 1: making allowances for flattery, who wasn't wrong. The forces that
Speaker 1: allowed Evergrand to grow so rapidly emanated in large part
Speaker 1: from Beijing. When the two thousand eight and nine global
Speaker 1: financial crisis cut demand for Chinese exports, the central government
Speaker 1: responded with a massive stimulus package that made borrowing easy.
Speaker 1: Land prices ord in both coastal megacities and previously sleepy
Speaker 1: regional centers, and developing housing became a near certain bet.
Speaker 1: The key to success was scale, achieved by borrowing with
Speaker 1: land as collateral. The bigger a developer became, the more
Speaker 1: it could borrow and at lower interest rates, a cycle
Speaker 1: that could continue as long as property prices kept rising.
Speaker 1: Supercharged by real estate profits, Evergrand expanded its reach into
Speaker 1: China's burgeoning consumer economy. Some ventures, such as theme parks,
Speaker 1: had at least a faint connection to property development. Others,
Speaker 1: including mineral water and a quixotic attempt to build a
Speaker 1: world class soccer club in Guangzhou, had none at all.
Speaker 1: It didn't take long for analysts, particularly outside the country,
Speaker 1: to predict that Chinese developers in general and Evergrand in particular,
Speaker 1: were building up far too much debt. As early as twelve,
Speaker 1: some argued that Hui's company would soon buckle under the
Speaker 1: weight of its leverage. But the day of reckoning never
Speaker 1: seemed to arrive. The increasings of as tocation and profitability
Speaker 1: of Chinese companies meant more of their workers could afford
Speaker 1: new homes. Ever, grant even weather to steep drop in
Speaker 1: home sales. In twenty when a glut of unwanted apartments
Speaker 1: drove average prices down by as much as six percent
Speaker 1: year on year, Whi became China's second richest man, behind
Speaker 1: only Ali Baba's Jack Ma. This resilience was partly a
Speaker 1: function of government policy, including a renewal of stimulus measures
Speaker 1: that helped prices recover, but policymakers in Beijing were haunted
Speaker 1: by the fragilities the slump exposed. At the end of
Speaker 1: twenty sixteen, the ruling parties Politbureau unveiled a new slogan,
Speaker 1: houses are for living in, not for speculation. One policymaker
Speaker 1: complained the following year that the economy was being kidnapped
Speaker 1: by the housing sector. Beijing began instituting a series of
Speaker 1: curbs on what's known as shadow financing, lending by entities
Speaker 1: other than banks or through practices such as selling wealth
Speaker 1: management products. Among other things, it prevented companies from raising
Speaker 1: money by offering guaranteed returns to investors. There were also
Speaker 1: efforts by provincial and city governments to damp real estate
Speaker 1: speculation on Hainan, An Island in the South China Sea,
Speaker 1: touted by developers as China's answer to Hawaii. Non locals
Speaker 1: were effectively blocked from buying homes before spending two years
Speaker 1: in the province, and all buyers were barred from reselling
Speaker 1: a residence within five years of purchasing it. Suddenly, Evergrands
Speaker 1: sprawling property empire seemed out of step with the times,
Speaker 1: and not only because of its high debtload. The government
Speaker 1: wanted affordable housing for young people. At the time, Evergrands
Speaker 1: marquee project was Ocean Flower Island, an extravagant plan to
Speaker 1: build a Dubai style artificial archipelago on the Hainan coast,
Speaker 1: with one of its fifty eight hotels designed to look
Speaker 1: like a European castle and another offering seven star luxury.
Speaker 1: We began a campaign to change Evergrand's image. The company
Speaker 1: plowed billions of you on into building houses in poorer
Speaker 1: rural areas, and in twenty nine been announced that it
Speaker 1: intended to become the world's largest manufacturer of electric vehicles.
Speaker 1: Sunny Peninsula was a product of Hui's shift. Rather than
Speaker 1: luxury condominiums for investors, it promised relatively affordable apartments for
Speaker 1: manufacturing workers. The acute phase of Evergrand's crisis began in
Speaker 1: twenty It could have been a relatively good year for
Speaker 1: the company, thanks to China's successful containment of the coronavirus.
Speaker 1: The economy contracted for only a single quarter, while looser
Speaker 1: monetary policy boosted the housing market. But for reasons that
Speaker 1: aren't entirely clear, Evergrand began struggling to cover its debts.
Speaker 1: It appealed to local government officials for help in averting
Speaker 1: a cash crunch as investors lost confidence, its biggest bank
Speaker 1: creditors started to slow its lending. It didn't help that
Speaker 1: Hui's knew ventures like the e V operation were sucking
Speaker 1: up much of its cash. Eventually, strategic investors, some of
Speaker 1: whom were also suppliers, agreed to waive their teen billion
Speaker 1: dollars the company owed them as part of a debt
Speaker 1: for equity swamp. It ended with its profits down by half. Then, authorities,
Speaker 1: convinced by the pandemic that risk prevention was more important
Speaker 1: than ever, ordered Evergrand and other top property developers to
Speaker 1: cut their debt. Guo shu Ching, China's top central bank official,
Speaker 1: in November, called real estate the biggest gray rhino for
Speaker 1: China's financial stability, referring to a large yet overlooked threat.
Speaker 1: Relations with the US also plunged to a new low.
Speaker 1: Fearful of being cut off from supplies of products such
Speaker 1: as microchips, the government declared improved scientific research and greater
Speaker 1: technological self sufficiency its top economic goals. Housing construction would
Speaker 1: be no help there. In March, Beijing signaled it might
Speaker 1: revive efforts to introduce a national property tax system, which
Speaker 1: would reduce local administration's reliance on land sales for income.
Speaker 1: The central and local governments also released some four hundred
Speaker 1: separate regulations on home buying, including rules preventing people from
Speaker 1: divorcing just to get around one house per family limits,
Speaker 1: and directed banks to slash mortgage lending and channel money
Speaker 1: to manufacturers instead outstanding mortgages as a share of GDP
Speaker 1: dropped for the first time in a decade. The results
Speaker 1: have been dramatic in the booming coastal cities that previously
Speaker 1: powered China's property market. A broker in Shunjan, who asked
Speaker 1: to be identified only by his surname Lee, says that
Speaker 1: inquiries from prospective buyers are down a third from a
Speaker 1: year ago. The transaction volume looks pretty ugly, and the
Speaker 1: only home sold were either due to the sellers urgently
Speaker 1: needing cash or worries that prices will drop further. He says.
Speaker 1: The sales decline hit Evergrand harder than any other large developer,
Speaker 1: and it spent much of this year seeking to raise
Speaker 1: cash by any means possible, including trying to sell its
Speaker 1: headquarters building in Hong Kong to avoid admitting to buyers
Speaker 1: that the company couldn't deliver their apartments, who said he'd
Speaker 1: issued a military order for projects to become pleaded as planned,
Speaker 1: His efforts fell short. This month, Chinese authorities told major
Speaker 1: lenders to Evergrand not to expect interest payments due on
Speaker 1: some bank loans in past Chinese housing slumps. This might
Speaker 1: be the moment when Beijing would step in to put
Speaker 1: a floor under the market, encouraging banks to lend to
Speaker 1: push up prices and boost revenue for property developers, but
Speaker 1: for now, policymakers seem willing to inflict economic pain to
Speaker 1: alter expectations that real estate prices will always rise. Many
Speaker 1: homeowners have gotten used to policymakers protecting their investments. If
Speaker 1: prices fall, that means the economy is in a downturn,
Speaker 1: and that will put huge pressure on the local government,
Speaker 1: says Jenny Wou, a financial worker in Shunjin who bought
Speaker 1: an apartment last year. So it's impossible that home prices
Speaker 1: would drop in Tier one cities. Tier one is shorthand
Speaker 1: for the mega cities of Beijing, Guangzhou, Shanghai and Shanjin.
Speaker 1: Evergrand could avoid bankruptcy. Most analysts expect to restructure ring,
Speaker 1: in which some banks roll over financing while other creditors
Speaker 1: receive assets such as properties and land rather than cash
Speaker 1: as repayment, and bondholders get some but not all, of
Speaker 1: their investment back. The company's humbling may nonetheless mark a
Speaker 1: turning point in China's economy. Developers will still be needed.
Speaker 1: The government plans for ten million people to move to
Speaker 1: urban areas every year through but the companies are likely
Speaker 1: to be smaller and they won't benefit as much from
Speaker 1: runaway price rises. Those who put their savings into Evergrand
Speaker 1: projects such as Sonny Peninsula are hoping their own slice
Speaker 1: of moderate prosperity has a place in Beijing's vision of
Speaker 1: a tamed property market. Last month, a group of angry
Speaker 1: buyers gathered at the site. We don't care about price cuts,
Speaker 1: said one, who asked to be identified by his surname Chung.
Speaker 1: Our one and only demand is that Evergrand can deliver
Speaker 1: the project, and that's this week's cover story. Find more
Speaker 1: in the current issue of Bloomberg Business Week magazine. It's
Speaker 1: on newsstands, online at Bloomberg dot com, business week Com,
Speaker 1: and on the Bloomberg terminal, and be sure to to
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