Shares of China Evergrande Group experienced a sharp drop of as much as 87% in their trading debut after a long suspension since March 21, 2022. The shares fell from their last close of 1.65 Hong Kong dollars to a mere 22 cents on Monday, leaving stakeholders in dismay. Despite a promising start to the year due to the relaxation of COVID-19 restrictions, the current economic scene presents a grim outlook.
Financial Health: Where Evergrande Stands
Evergrande’s recent financial report indicated significant challenges:
- A posted loss of 39.25 billion yuan ($5.38 billion) for the six months ending in June, which, although significant, is smaller than the 86.17 billion yuan loss from the same period a year prior.
- Reported revenue of 128.81 billion yuan, a significant rise from 89.28 billion yuan in June 2022.
- Combined losses of $81 billion for 2021 and 2022 resulting from property writedowns, land returns, financial asset losses, and financing costs.
- Total liabilities as of June this year were a staggering 2.39 trillion yuan, with total assets amounting to 1.74 trillion yuan.
Bankruptcy and Restructuring
- Evergrande filed for Chapter 15 bankruptcy protection in a U.S. court in July, safeguarding its U.S. assets from creditors while exploring a restructuring plan overseas.
- The developer defaulted in 2021, announcing a restructuring program offshore in March due to its struggles with project completions and debt repayments.
- Recently, the company revealed a multi-billion dollar strategy to reconcile with international creditors, indicating that between $36 billion to $44 billion would be required to complete pending property projects.
- In line with restructuring, Evergrande has proposed a debt swap into new notes and equities in two subsidiaries.
Significance in China’s Economy
Evergrande was not just any developer:
- For several years, the Shenzhen-based firm was China’s top property developer in sales.
- The company’s default in 2021 precipitated a crisis in China’s real estate sector, previously accounting for nearly 30% of the nation’s economy.
Relaxation of Rules to Support Real Estate
In an attempt to revive a struggling industry:
- Beijing announced several measures over the weekend to stimulate home buying and breathe life into the real estate sector.
- Regulations have been relaxed, including a provision that permits local governments to consider previous mortgage holders as first-time homebuyers in major cities.
- Income tax rebates will be extended for those buying new homes after selling previous properties within a year.
- Despite these interventions, most analysts believe that additional efforts, such as reduced deposit rates and more funding, will be necessary to prevent a collapse in China’s property market.
While shares of most Chinese property firms saw a boost after the regulatory changes, Evergrande experienced the opposite. Properties like Country Garden saw a 2.5% rise in Hong Kong, while Guangzhou R&F Properties surged by almost 4%. However, experts, including those from Nomura, maintain that the current measures may not be enough to reverse the downturn in China’s property sector.
Evergrande, once China’s real-estate titan, faces an uncertain future. Its dramatic stock plummet on Monday, combined with its significant financial losses and debt, highlights the company’s challenges. As the company embarks on a complex debt restructuring journey and China’s government intervenes to stabilize the property market, stakeholders worldwide watch with bated breath.