A day after the global stock market hit the concern about Evergrande, one of the main real estate companies in China and the most indebted in the world, the founder of the group, Xu Jiayin, wanted to send a message of tranquility. The company “will come out of its darkest moment soon,” he promised in a letter to the firm’s 200,000 employees.
The letter comes at a key moment. It is written on the occasion of the Mid-Autumn festival, which is celebrated this Tuesday, a holiday in China, and in which it is traditional for bosses to congratulate their employees. And it is published just two days before Evergrande must face an interest maturity on Thursday, worth 80 million dollars (about 70 million euros), on its obligations, which are around 300,000 million dollars. Most analysts believe that they will not be able to pay on time, but the group has a one-month grace period to satisfy that debit.
The company, affected by a serious liquidity crisis, has been forced to interrupt the construction of several projects that have already started and has admitted that it faces difficulties in meeting its payments, although it assures that it will end up solving its situation. But the fear of a bankruptcy that would make buyers, suppliers and investors lose their money triggered panic in the stock markets on Monday, for fear of a contagion that could sow chaos in the world economy. This Tuesday, the Asian markets have continued to suffer, although the falls had softened. Evergrande shares, however, continued their free fall, falling 3% on the Hong Kong Stock Exchange. So far this year, they have lost 84% of their value.
“I firmly believe that with the efforts and hard work of all of you Evergrande will emerge from its darkest moment, resume construction of its projects at full capacity as soon as possible, and achieve the fundamental objective of delivering real estate projects as we are. we have committed ”, writes Xu, who founded the promoter in 1996. The businessman does not specify what steps he foresees to achieve that goal. “The spirit of the people of Evergrande, to never give up and to grow stronger when the wind is against us, is our source of strength to overcome difficulties!” He adds.
Assets equivalent to 2.2% of GDP
Evergrande, one of the main real estate companies in China, with assets equivalent to 2.2% of the Asian giant’s GDP, had undergone a huge expansion over the last decade, which led it to invest in a wide range of businesses, from football to wealth management, through food, health or theme parks. Part of their business model was to use loans to build real estate developments with borrowed money, coming from banks, but also from their investors, home buyers or their own employees, through wealth management products that promised generous interest. He sold his properties before they were finished and with those funds he would undertake new projects.
But regulators have imposed a series of new rules since last year to control debt in the real estate sector, which accounts for a fifth of China’s GDP and accumulates $ 5 trillion worth of debts. Among them, the impossibility of selling unfinished properties.
This impossibility has left the group without liquidity to meet its payments. With creditors among its own contractors and suppliers, investors in its wealth management products and home buyers, as well as financial institutions, Evergrande has been forced to shut down more than 500 projects in cities across China.
One of the unknowns that worries investors is whether the Chinese government will intervene to rescue the real estate company, because it is “too big to fail”, or if, on the contrary, it will leave it to its own devices. Most analysts are betting on an intermediate solution, in which Evergrande has to undertake some form of restructuring that compensates the group’s home buyers and suppliers, while large investors will lose money.