WEBVTT - Cover Story: Evergrande Debt Crisis 0:00:00.680 --> 0:00:04.640 Broadcasting from the financial capital of the world Bloomberg eleven 0:00:04.760 --> 0:00:09.360 Frio in New York to Washington, d C. Bloomberg to Boston, 0:00:09.440 --> 0:00:12.879 Bloomberg one O six one to San Francisco, Bloomberg nine 0:00:12.960 --> 0:00:16.200 sixty to the country Sirius XM Chado one nineteen and 0:00:16.280 --> 0:00:19.640 around the globe the Bloomberg Business app and Bloomberg Radio 0:00:19.760 --> 0:00:25.040 dot Com. This is Bloomberg Business Week. I'm Carol Masser 0:00:25.160 --> 0:00:28.240 and I'm Tim Stunnobek the international cover this week. China, 0:00:28.320 --> 0:00:32.199 Evergrand grew until recently, the world's largest property developer, is 0:00:32.240 --> 0:00:36.000 buckling under three billion dollars in liabilities, and financial markets 0:00:36.000 --> 0:00:39.680 are bracing for potential aftershocks. Evergrand's troubles are partly a 0:00:39.720 --> 0:00:44.479 familiar tale, but its situation also reflects deliberate policy choices 0:00:44.520 --> 0:00:47.400 made by the ruling Communist Party under President Ji Jimping. 0:00:47.720 --> 0:00:50.080 Like the tech giants Ali Baba in ten Cent, which 0:00:50.080 --> 0:00:53.640 were the targets of sudden regulatory crackdowns this summer, Evergrand 0:00:53.680 --> 0:00:56.600 managed to find itself in the way of the party's priorities. 0:00:57.440 --> 0:01:02.560 Too Big may still fail as developer Evergrand faces a 0:01:02.560 --> 0:01:06.160 debt crunch, China tries to depend less on real Estate 0:01:06.800 --> 0:01:12.720 by Bloomberg News. Sunny Peninsula, a seaside development in the 0:01:12.760 --> 0:01:16.280 southern Chinese city of Guangzhou, was supposed to house five 0:01:16.319 --> 0:01:19.600 thousand families in dozens of towers spread across an area 0:01:19.640 --> 0:01:23.120 the size of thirty soccer fields. Many of the buyers 0:01:23.120 --> 0:01:26.720 were white collar workers, benefiting from the fastest urbanization in 0:01:26.800 --> 0:01:30.640 human history, but the project now looks more like the 0:01:30.640 --> 0:01:34.319 set of a disaster movie. Half finished apartment blocks stand 0:01:34.319 --> 0:01:38.320 empty and abandoned, untouched for months in the humid summer weather. 0:01:38.720 --> 0:01:42.319 Piles of rebar and steel beams are accumulating coatings of rust. 0:01:43.280 --> 0:01:47.640 China Evergrand Group, until recently, the world's largest property developer, 0:01:48.040 --> 0:01:51.760 owns dozens of stalled sites like Sunny Peninsula across China. 0:01:52.480 --> 0:01:55.560 Buckling under more than three hundred billion dollars in liabilities, 0:01:55.880 --> 0:01:59.000 the company is close to collapse, leaving one point five 0:01:59.080 --> 0:02:03.840 million buyers waiting for finished homes. The global financial markets 0:02:03.840 --> 0:02:08.280 are bracing for potential aftershocks. Evergrand is China's largest issuer 0:02:08.360 --> 0:02:11.840 of high yield dollar denominated bonds and bills, are coming 0:02:11.880 --> 0:02:14.960 due to an array of banks and suppliers. Given its 0:02:14.960 --> 0:02:17.600 footprint in the housing market, there's also a risk of 0:02:17.639 --> 0:02:21.280 a disorderly collapse triggering a broader decline in property prices, 0:02:21.840 --> 0:02:24.400 bad news in an economy where twenty seven percent of 0:02:24.400 --> 0:02:27.480 loans are for real estate. The stress isn't only being 0:02:27.520 --> 0:02:31.560 felt in bankers offices. Earlier this month, HomeBuyer surrounded a 0:02:31.600 --> 0:02:35.040 government office in guang Zou to demand construction be restarted 0:02:35.040 --> 0:02:38.799 on their apartments, and unconfirmed videos circulating on social media 0:02:38.880 --> 0:02:43.440 depict similar protests in other cities. Furious retail investors who 0:02:43.520 --> 0:02:46.760 helped fund Evergrand's expansion have turned up at the company's 0:02:46.760 --> 0:02:50.560 Shunjun headquarters to complain about delayed repayments on wealth management 0:02:50.560 --> 0:02:54.720 products it's sold. Evergrand's troubles are partly a familiar tale 0:02:55.120 --> 0:02:59.560 of an overextended, systemically important company taxing its creditor's patients. 0:03:00.160 --> 0:03:03.040 That alone would make it a test for Chinese authorities, 0:03:03.480 --> 0:03:06.880 but its situation also reflects deliberate policy choices made by 0:03:06.919 --> 0:03:10.680 the ruling Communist Party under President Shi Xin Ping, like 0:03:10.840 --> 0:03:13.760 the tech giants Ali Baba Group and ten Scent Holdings, 0:03:14.040 --> 0:03:17.120 which were the targets of sudden regulatory crackdowns that wiped 0:03:17.160 --> 0:03:20.080 out tens of billions of dollars in market value. This summer, 0:03:20.600 --> 0:03:23.680 evergrand found itself in the way of the party's priorities. 0:03:24.160 --> 0:03:27.120 For several years, officials have been taking steps to cool 0:03:27.160 --> 0:03:29.880 real estate prices, which they see as a potential source 0:03:29.880 --> 0:03:32.960 of risk, and signaling that they expect both house price 0:03:33.000 --> 0:03:36.480 growth and new construction to remain roughly flat. In the 0:03:36.520 --> 0:03:39.560 central government, the view has shifted over how much China's 0:03:39.600 --> 0:03:42.760 economy can depend on the housing market, says Ju Ning, 0:03:43.200 --> 0:03:47.400 a former adviser to China's Central Bank. Instead, Beijing wants 0:03:47.400 --> 0:03:50.720 to steer China's economic resources toward areas it views as 0:03:50.760 --> 0:03:55.040 more central to national security, above all, high tech manufacturing 0:03:55.160 --> 0:03:57.320 that can help it reduce its reliance on the U 0:03:57.440 --> 0:04:01.440 S and its allies. The party is so emphasizing financial 0:04:01.480 --> 0:04:04.800 and social stability over sheer growth. Leaders speak of the 0:04:04.840 --> 0:04:10.400 goals of moderate prosperity and common prosperity, and households accumulating 0:04:10.400 --> 0:04:13.680 more debt to buy multiple or more luxurious homes doesn't 0:04:13.680 --> 0:04:17.480 necessarily fit with that vision, nor does the wealth inequality 0:04:17.520 --> 0:04:21.360 that property booms can create. She's pledges to cut pollution 0:04:21.400 --> 0:04:25.880 and carbon emissions also require curbing construction. China may be 0:04:25.960 --> 0:04:28.680 willing to let Evergrand fail if it thinks it can 0:04:28.720 --> 0:04:31.880 engineer a soft landing for the real estate sector. The 0:04:31.960 --> 0:04:35.440 fifty six trillion dollar domestic financial system is dominated by 0:04:35.480 --> 0:04:38.840 state owned lenders, which give the government extensive power both 0:04:38.880 --> 0:04:42.720 to squeeze borrowers and to manage the impact of defaults, 0:04:42.720 --> 0:04:46.560 but the stakes are enormous when industries such as construction 0:04:46.640 --> 0:04:49.839 and property services are included. Real estate accounts for at 0:04:49.880 --> 0:04:53.159 least fifteen percent of the nation's gross domestic product, and 0:04:53.200 --> 0:04:56.080 more than seventy percent of urban China's wealth is stored 0:04:56.120 --> 0:05:00.640 in housing. Countries such as Australia, Brazil and Zambia depend 0:05:00.720 --> 0:05:05.600 on China's relentless demand for steel, copper, and other construction materials, 0:05:05.760 --> 0:05:09.039 and US and European companies increasingly looked to its consumer 0:05:09.080 --> 0:05:17.279 market for growth. In When China created a nationwide housing 0:05:17.320 --> 0:05:21.320 market after tightly restricting private sales for decades, only a 0:05:21.400 --> 0:05:24.320 third of its people lived in towns and cities. Now 0:05:24.360 --> 0:05:28.120 almost two thirds do, increasing the urban population by four 0:05:28.160 --> 0:05:31.200 hundred and eighty million. The homes they've moved into are 0:05:31.240 --> 0:05:35.320 modestly sized by developed world standards, averaging less than forty 0:05:35.320 --> 0:05:38.240 square meters or about four hundred and thirty one square 0:05:38.279 --> 0:05:42.119 feet per person, but about nine of urban residents owned 0:05:42.120 --> 0:05:45.440 those homes, worth more than fifty trillion dollars in total. 0:05:45.640 --> 0:05:49.560 According to Goldman Sachs, this is the wave ever Grand Road. 0:05:50.040 --> 0:05:53.839 Its founder and chairman, Hui Kayan, was born into grinding 0:05:53.920 --> 0:05:58.359 poverty in the central province of Henan in eight In school, 0:05:58.440 --> 0:06:01.159 all I eight was sweet potato and steamed bread. He 0:06:01.279 --> 0:06:04.479 said in a rare speech in twenty eighteen, I really 0:06:04.520 --> 0:06:07.520 hoped I could leave the village. He found his ticket 0:06:07.560 --> 0:06:09.960 out by becoming one of a tiny number of rural 0:06:10.000 --> 0:06:13.240 students to pass the university entrance exam, going on to 0:06:13.240 --> 0:06:17.520 study metallurgy. In nineteen ninety two, we came to Shunjin, 0:06:18.000 --> 0:06:20.239 then a small town on the border with Hong Kong. 0:06:20.880 --> 0:06:23.839 After working as an importer or exporter, he dove into 0:06:23.839 --> 0:06:28.800 the property market, founding Evergrand in ninety seven. By twenty sixteen, 0:06:28.920 --> 0:06:33.159 it was China's biggest property developer by sales. Everything for 0:06:33.240 --> 0:06:35.960 me and Evergrand is given by the Party, the state, 0:06:36.040 --> 0:06:40.000 and society, he said in his twenty eighteen speech, even 0:06:40.080 --> 0:06:44.159 making allowances for flattery, who wasn't wrong. The forces that 0:06:44.200 --> 0:06:47.560 allowed Evergrand to grow so rapidly emanated in large part 0:06:47.720 --> 0:06:51.120 from Beijing. When the two thousand eight and nine global 0:06:51.160 --> 0:06:55.120 financial crisis cut demand for Chinese exports, the central government 0:06:55.120 --> 0:06:58.839 responded with a massive stimulus package that made borrowing easy. 0:06:59.160 --> 0:07:03.239 Land prices ord in both coastal megacities and previously sleepy 0:07:03.320 --> 0:07:07.000 regional centers, and developing housing became a near certain bet. 0:07:07.440 --> 0:07:10.680 The key to success was scale, achieved by borrowing with 0:07:10.800 --> 0:07:14.040 land as collateral. The bigger a developer became, the more 0:07:14.080 --> 0:07:16.880 it could borrow and at lower interest rates, a cycle 0:07:16.960 --> 0:07:19.840 that could continue as long as property prices kept rising. 0:07:20.520 --> 0:07:24.440 Supercharged by real estate profits, Evergrand expanded its reach into 0:07:24.520 --> 0:07:28.880 China's burgeoning consumer economy. Some ventures, such as theme parks, 0:07:29.160 --> 0:07:32.840 had at least a faint connection to property development. Others, 0:07:32.880 --> 0:07:35.800 including mineral water and a quixotic attempt to build a 0:07:35.840 --> 0:07:38.680 world class soccer club in Guangzhou, had none at all. 0:07:39.400 --> 0:07:42.840 It didn't take long for analysts, particularly outside the country, 0:07:43.160 --> 0:07:47.200 to predict that Chinese developers in general and Evergrand in particular, 0:07:47.480 --> 0:07:51.000 were building up far too much debt. As early as twelve, 0:07:51.360 --> 0:07:54.280 some argued that Hui's company would soon buckle under the 0:07:54.280 --> 0:07:57.520 weight of its leverage. But the day of reckoning never 0:07:57.560 --> 0:08:01.480 seemed to arrive. The increasings of as tocation and profitability 0:08:01.480 --> 0:08:04.640 of Chinese companies meant more of their workers could afford 0:08:04.680 --> 0:08:07.600 new homes. Ever, grant even weather to steep drop in 0:08:07.680 --> 0:08:11.240 home sales. In twenty when a glut of unwanted apartments 0:08:11.280 --> 0:08:13.960 drove average prices down by as much as six percent 0:08:14.120 --> 0:08:18.440 year on year, Whi became China's second richest man, behind 0:08:18.520 --> 0:08:21.960 only Ali Baba's Jack Ma. This resilience was partly a 0:08:21.960 --> 0:08:25.720 function of government policy, including a renewal of stimulus measures 0:08:25.720 --> 0:08:29.880 that helped prices recover, but policymakers in Beijing were haunted 0:08:29.880 --> 0:08:33.640 by the fragilities the slump exposed. At the end of 0:08:33.679 --> 0:08:37.680 twenty sixteen, the ruling parties Politbureau unveiled a new slogan, 0:08:38.120 --> 0:08:42.280 houses are for living in, not for speculation. One policymaker 0:08:42.320 --> 0:08:45.239 complained the following year that the economy was being kidnapped 0:08:45.280 --> 0:08:48.920 by the housing sector. Beijing began instituting a series of 0:08:49.000 --> 0:08:53.080 curbs on what's known as shadow financing, lending by entities 0:08:53.080 --> 0:08:55.839 other than banks or through practices such as selling wealth 0:08:55.880 --> 0:08:59.959 management products. Among other things, it prevented companies from raising 0:09:00.040 --> 0:09:03.880 money by offering guaranteed returns to investors. There were also 0:09:03.920 --> 0:09:06.840 efforts by provincial and city governments to damp real estate 0:09:06.840 --> 0:09:10.360 speculation on Hainan, An Island in the South China Sea, 0:09:10.480 --> 0:09:14.440 touted by developers as China's answer to Hawaii. Non locals 0:09:14.440 --> 0:09:17.720 were effectively blocked from buying homes before spending two years 0:09:17.720 --> 0:09:20.840 in the province, and all buyers were barred from reselling 0:09:20.880 --> 0:09:24.920 a residence within five years of purchasing it. Suddenly, Evergrands 0:09:24.960 --> 0:09:28.240 sprawling property empire seemed out of step with the times, 0:09:28.600 --> 0:09:31.760 and not only because of its high debtload. The government 0:09:31.760 --> 0:09:35.400 wanted affordable housing for young people. At the time, Evergrands 0:09:35.440 --> 0:09:39.560 marquee project was Ocean Flower Island, an extravagant plan to 0:09:39.600 --> 0:09:43.240 build a Dubai style artificial archipelago on the Hainan coast, 0:09:43.679 --> 0:09:45.920 with one of its fifty eight hotels designed to look 0:09:45.960 --> 0:09:50.800 like a European castle and another offering seven star luxury. 0:09:51.200 --> 0:09:54.920 We began a campaign to change Evergrand's image. The company 0:09:54.960 --> 0:09:57.840 plowed billions of you on into building houses in poorer 0:09:57.920 --> 0:10:00.800 rural areas, and in twenty nine been announced that it 0:10:00.840 --> 0:10:04.760 intended to become the world's largest manufacturer of electric vehicles. 0:10:05.160 --> 0:10:08.560 Sunny Peninsula was a product of Hui's shift. Rather than 0:10:08.640 --> 0:10:12.960 luxury condominiums for investors, it promised relatively affordable apartments for 0:10:13.040 --> 0:10:20.280 manufacturing workers. The acute phase of Evergrand's crisis began in 0:10:20.320 --> 0:10:23.360 twenty It could have been a relatively good year for 0:10:23.400 --> 0:10:27.280 the company, thanks to China's successful containment of the coronavirus. 0:10:27.559 --> 0:10:31.120 The economy contracted for only a single quarter, while looser 0:10:31.120 --> 0:10:34.760 monetary policy boosted the housing market. But for reasons that 0:10:34.800 --> 0:10:39.080 aren't entirely clear, Evergrand began struggling to cover its debts. 0:10:39.400 --> 0:10:42.480 It appealed to local government officials for help in averting 0:10:42.520 --> 0:10:46.280 a cash crunch as investors lost confidence, its biggest bank 0:10:46.320 --> 0:10:49.679 creditors started to slow its lending. It didn't help that 0:10:49.800 --> 0:10:53.120 Hui's knew ventures like the e V operation were sucking 0:10:53.200 --> 0:10:57.079 up much of its cash. Eventually, strategic investors, some of 0:10:57.120 --> 0:11:00.559 whom were also suppliers, agreed to waive their teen billion 0:11:00.559 --> 0:11:02.760 dollars the company owed them as part of a debt 0:11:02.840 --> 0:11:09.120 for equity swamp. It ended with its profits down by half. Then, authorities, 0:11:09.240 --> 0:11:12.240 convinced by the pandemic that risk prevention was more important 0:11:12.280 --> 0:11:15.880 than ever, ordered Evergrand and other top property developers to 0:11:15.960 --> 0:11:20.040 cut their debt. Guo shu Ching, China's top central bank official, 0:11:20.400 --> 0:11:23.680 in November, called real estate the biggest gray rhino for 0:11:23.760 --> 0:11:27.840 China's financial stability, referring to a large yet overlooked threat. 0:11:28.320 --> 0:11:31.200 Relations with the US also plunged to a new low. 0:11:31.800 --> 0:11:34.520 Fearful of being cut off from supplies of products such 0:11:34.559 --> 0:11:38.960 as microchips, the government declared improved scientific research and greater 0:11:39.000 --> 0:11:44.200 technological self sufficiency its top economic goals. Housing construction would 0:11:44.200 --> 0:11:47.679 be no help there. In March, Beijing signaled it might 0:11:47.720 --> 0:11:51.480 revive efforts to introduce a national property tax system, which 0:11:51.480 --> 0:11:55.240 would reduce local administration's reliance on land sales for income. 0:11:55.920 --> 0:11:59.240 The central and local governments also released some four hundred 0:11:59.280 --> 0:12:03.160 separate regulations on home buying, including rules preventing people from 0:12:03.200 --> 0:12:06.560 divorcing just to get around one house per family limits, 0:12:06.720 --> 0:12:09.960 and directed banks to slash mortgage lending and channel money 0:12:10.000 --> 0:12:14.199 to manufacturers instead outstanding mortgages as a share of GDP 0:12:14.480 --> 0:12:17.600 dropped for the first time in a decade. The results 0:12:17.600 --> 0:12:20.559 have been dramatic in the booming coastal cities that previously 0:12:20.640 --> 0:12:24.520 powered China's property market. A broker in Shunjan, who asked 0:12:24.520 --> 0:12:27.440 to be identified only by his surname Lee, says that 0:12:27.520 --> 0:12:30.320 inquiries from prospective buyers are down a third from a 0:12:30.360 --> 0:12:34.040 year ago. The transaction volume looks pretty ugly, and the 0:12:34.120 --> 0:12:36.720 only home sold were either due to the sellers urgently 0:12:36.800 --> 0:12:40.480 needing cash or worries that prices will drop further. He says. 0:12:40.960 --> 0:12:44.720 The sales decline hit Evergrand harder than any other large developer, 0:12:45.000 --> 0:12:47.040 and it spent much of this year seeking to raise 0:12:47.080 --> 0:12:50.280 cash by any means possible, including trying to sell its 0:12:50.320 --> 0:12:54.080 headquarters building in Hong Kong to avoid admitting to buyers 0:12:54.080 --> 0:12:57.480 that the company couldn't deliver their apartments, who said he'd 0:12:57.520 --> 0:13:01.000 issued a military order for projects to become pleaded as planned, 0:13:01.640 --> 0:13:05.480 His efforts fell short. This month, Chinese authorities told major 0:13:05.559 --> 0:13:08.679 lenders to Evergrand not to expect interest payments due on 0:13:08.720 --> 0:13:12.959 some bank loans in past Chinese housing slumps. This might 0:13:13.000 --> 0:13:15.320 be the moment when Beijing would step in to put 0:13:15.320 --> 0:13:18.320 a floor under the market, encouraging banks to lend to 0:13:18.400 --> 0:13:22.040 push up prices and boost revenue for property developers, but 0:13:22.200 --> 0:13:26.080 for now, policymakers seem willing to inflict economic pain to 0:13:26.160 --> 0:13:30.320 alter expectations that real estate prices will always rise. Many 0:13:30.400 --> 0:13:34.679 homeowners have gotten used to policymakers protecting their investments. If 0:13:34.720 --> 0:13:37.560 prices fall, that means the economy is in a downturn, 0:13:37.960 --> 0:13:40.360 and that will put huge pressure on the local government, 0:13:40.679 --> 0:13:43.840 says Jenny Wou, a financial worker in Shunjin who bought 0:13:43.840 --> 0:13:47.240 an apartment last year. So it's impossible that home prices 0:13:47.240 --> 0:13:51.000 would drop in Tier one cities. Tier one is shorthand 0:13:51.040 --> 0:13:54.720 for the mega cities of Beijing, Guangzhou, Shanghai and Shanjin. 0:13:55.640 --> 0:14:00.200 Evergrand could avoid bankruptcy. Most analysts expect to restructure ring, 0:14:00.200 --> 0:14:03.679 in which some banks roll over financing while other creditors 0:14:03.679 --> 0:14:06.839 receive assets such as properties and land rather than cash 0:14:06.880 --> 0:14:10.160 as repayment, and bondholders get some but not all, of 0:14:10.200 --> 0:14:13.920 their investment back. The company's humbling may nonetheless mark a 0:14:14.000 --> 0:14:17.880 turning point in China's economy. Developers will still be needed. 0:14:18.280 --> 0:14:20.800 The government plans for ten million people to move to 0:14:20.880 --> 0:14:25.320 urban areas every year through but the companies are likely 0:14:25.360 --> 0:14:27.920 to be smaller and they won't benefit as much from 0:14:27.960 --> 0:14:31.880 runaway price rises. Those who put their savings into Evergrand 0:14:31.880 --> 0:14:35.240 projects such as Sonny Peninsula are hoping their own slice 0:14:35.240 --> 0:14:38.200 of moderate prosperity has a place in Beijing's vision of 0:14:38.240 --> 0:14:41.600 a tamed property market. Last month, a group of angry 0:14:41.600 --> 0:14:45.240 buyers gathered at the site. We don't care about price cuts, 0:14:45.360 --> 0:14:48.560 said one, who asked to be identified by his surname Chung. 0:14:49.200 --> 0:14:51.720 Our one and only demand is that Evergrand can deliver 0:14:51.760 --> 0:14:54.920 the project, and that's this week's cover story. Find more 0:14:54.920 --> 0:14:57.240 in the current issue of Bloomberg Business Week magazine. It's 0:14:57.240 --> 0:15:00.400 on newsstands, online at Bloomberg dot com, business week Com, 0:15:00.400 --> 0:15:02.600 and on the Bloomberg terminal, and be sure to to 0:15:02.600 --> 0:15:05.000 listen to our Bloomberg Business Week Radio show. It airs 0:15:05.000 --> 0:15:07.200 live Monday through Friday at two pm Wall Street Time 0:15:07.240 --> 0:15:10.600 on Bloomberg Radio. Watches two in our daily broadcast. On YouTube, 0:15:10.640 --> 0:15:13.360 just search Bloomberg Global News, and you can also see 0:15:13.400 --> 0:15:16.200 me at Bloomberg Quicktake available at Bloomberg dot com, slash 0:15:16.280 --> 0:15:19.720 qt and streaming platforms like Roku, Apple TV, Samsung TV, 0:15:19.920 --> 0:15:23.400 and more. I'm Tim Stanabeck, I'm Carol Masser. This is 0:15:23.400 --> 0:15:24.000 Bloomberg