China’s Evergrande files for bankruptcy in US: Rise and fall of the real estate behemoth

The troubled Chinese real-estate firm Evergrande has filed for Chapter 15 bankruptcy in a US court. The development comes five months after the real estate behemoth unveiled its long-awaited restructuring plan, the largest in China’s history, and 20 months after the firm defaulted on its debt – sparking a massive property crisis the reverberations of which are still being felt today. Chapter 15 bankruptcy protection allows a court to step in when an insolvency case involves another country. It is aimed at promoting cooperation between US courts, debtors, and other countries’ courts involved in cross-border bankruptcy proceedings. Let’s take a closer look at the rise and fall of Evergrande:  Humble beginnings Evergrande sprung from the mind of Xu Jiayin. As per Nikkei Asia, Xu, hailed from a poor family in Henan Province. His father was a World War II veteran and his mother died soon after giving birth to him. Brought up by his grandmother, Xu recalled in a 2017 speech how he ate only sweet potato and steamed bread in his school years. “The sheets I laid, the quilts I covered, and the clothes I wore were all covered with piles of patches,” said Xu, also known as Hui Ka Yan in Cantonese.

“At that time, my greatest wish was to go out of the countryside, find a job and be able to eat better food.”

After leaving school in 1976 – the end of the decade-long Cultural Revolution – he struggled to find work. As colleges reopened, Xu studied metallurgy and was later assigned to a state-run steel factory. He left in 1992 for Shenzhen, the buzzing heart of China’s reform and opening-up experiment in the 1990s, before founding Evergrande in 1996. As per Nikkei Asia, the firm initially had a staff of just eight. China at the time was rapidly urbanising and Xu used the country’s ‘reform policies’ to his advantage. Xu’s first project was a 110,000-sq.-meter site in Guangzhou – which he called Jinbi Garden. [caption id=“attachment_13012702” align=“alignnone” width=“640”] Graphic: Pranay Bhardwaj[/caption] It took Xu a year to finish the project – by which time the financial crisis had come and gone though he survived unscathed. The project brought Xu a lot of money – and was the start of it all for Evergrande, according to the newspaper. Rapid expansion By 2009, Evergrande debuted on the Hong Kong Stock Exchange.

As per The Guardian, the firm raised $9 billion through its IPO.

By the January-March quarter of 2010, it was thought to have sold the most square meters of housing in China. Evergrande quickly sought to expand. As per The Guardian, Evergrande bought China’s largest football club Guangzhou FC – which it quickly renamed Guangzhou Evergrande. The firm signed ex-Italy head coach Marcello Lippi to a blockbuster $32 million contract in 2012. It also spend billions of dollars on foreign players – which helped it win a string of titles. In 2013, Evergrande established an endowment at Harvard University. It also bought a 160-passenger private jet at a cost exceeding $45 million. The company also launched a slew of businesses on the side including dairy, grain and oil companies and even attempted to build an electric car. All of this was supported by massive debt. By 2017, Xu could do no wrong. Evergrande’s share price had vaulted his net worth to an estimated $43 billion. Xu was the richest man in Asia. [caption id=“attachment_12023172” align=“alignnone” width=“640”] Xu Jiayin, also known as Hui Ka Yan, was at the top of the world in 2017. AFP[/caption] Xu, speaking at the launch of his car firm in 2019, explained his five-pronged approach to business thus – rapid acquisition, close collaboration, intense networking, large scale and good quality, as per The Guardian. But trouble was already brewing. The trouble begins In November 2018, the first signs of trouble emerged when China’s central bank added Evergrande to its list of highly indebted conglomerates to watch. It warned that a potential collapse could cause systemic risks. In August 2020, regulators announced caps for three different debt ratios in a scheme dubbed “three red lines”. This tightened lending to the real estate sector. Evergrande reacted quickly – by selling 28 percent of its property management unit for $3 billion. It also began offloading properties at increasingly steep discounts. In 2021, regulators, as part of a crackdown on the property sector, began tightening scrutiny on the controversial practice of taking deposits from homeowners before a house is complete.

This was a major source of funding for developers and a huge blow for Evergrande.

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Research firm Capital Economics estimated that Evergrande had $207 billion in pre-sale liabilities at the end of June 2021 – equal to roughly 1.4 million homes it had committed to building.  The bust The first warning shot came in August 2021 when an advertiser sued the company over unpaid dues. A string of cases from nervous subcontractors followed. Work at several construction sites ground to a halt. Global ratings agencies including Fitch, Moody’s, and S&P downgraded Evergrande’s outlook to negative. This made it harder for the troubled firm to borrow money and raised fears of a possible bankruptcy – sending shockwaves through the world’s number-two economy. The company in a stock market filing wrote that its total liabilities swelled to $305 billion and admitted that faced the “risks of defaults on borrowings”. In September 2021, Evergrande said it is under “tremendous pressure” and may not be able to meet its liabilities. It warned that negative media coverage and rumours had led to waning confidence and falling property sales during a normally buoyant selling period. Public protests erupted outside the company’s headquarters in Shenzhen and other locations across the country. Angry investors and homebuyers demanded their money back. [caption id=“attachment_10005041” align=“alignnone” width=“640”] Protests broke out against Evergrande all over China. AFP[/caption] The local government in Guangdong, where the firm is headquartered, summoned company chairman as it announced it is sending a working group to the company. Shehzad Qazi, managing director of data analytics firm China Beige Book, predicted the restructuring will “ultimately be a controlled demolition” - a bid by the Chinese government to let Evergrande fail, while seeking to contain the impact of its demise. In December 2021, Evergrande defaulted on its debt. The Fitch Ratings agency cited the crisis-hit developer’s failure to make repayments of more than $1.2 billion. In March 2023, Evergrande announced its long-awaited restructuring plan – the biggest in Chinese history. In July 2023, the firm announced a loss of $81 billion over the past two years. In August, Evergrande filed for Chapter 15 bankruptcy in US court. ‘Unlikely to survive unscathed’  Experts say they should have seen it coming. Dexter Roberts, senior fellow at the Washington DC-based Atlantic Council Asia Security Initiative, told The Guardian, “For a long time, Evergrande’s business model, borrowing large sums of money and aggressively selling apartments that have not even been built, seemed like a smoking gun.”  While some attributed Xu’s success has come from useful close relationships, including with the brother of former premier Wen Jiabao, he attributed his success to education – and the Communist Party. “Without the resumption of the national college entrance examination, I am still in the countryside. Without a state grant of 14 yuan, I couldn’t go to university. Without the country’s reform and opening up, Evergrande is not what it is today,” he said. “Everything of Evergrande is given by the Party, the state and the society.” But Xu is now facing a government crackdown on extreme wealth, with President Xi Jinping leading a drive for “common prosperity” against vast wealth. Already, Xu has seen a dip in over 90 per cent of his fortune – from 43 billion in 2017 to $3 billion. And it could get worse. “Xu is also one of those people Beijing now finds distasteful – flashy and over the top,” Roberts added. “I’d be really surprised if he emerges from this crisis unscathed.” Even some in Xu’s hometown are critical of him. “Because Evergrande lifted home prices,” one man told Nikkei Asia. “Houses here now cost as much as 3,000 yuan to 6,000 yuan [per square meter]. Ordinary people cannot afford them.” With inputs from agencies