260 billion in debt: here are the different scenarios considered for the Chinese real estate giant

Faillite, restructuring or bailout? Crushed by an abyssal debt, the Chinese giant Evergrande is playing its survival.

The biggest real estate developer in China is dragging a slate estimated at nearly 260 billion euros. And the group admitted on Tuesday that it may not be able to pay its creditors.

Here are the different options available for Evergrande.

Bankruptcy

Amid persistent rumors about his financial health, Evergrande has denied being on the verge of bankruptcy.

But he admitted on Tuesday to face “immense pressure” on the financial level.

Evergrande is a mastodon of real estate and construction, two sectors “essential for Chinese growth”, which represent 13% of GDP, notes the sinologist Jean-Louis Rocca, researcher at Sciences Po.

Evergrande says it employs 200,000 people and indirectly affects 3.8 million jobs in China.

Any bankruptcy would have considerable consequences with a “domino effect” on the economy of the Asian giant.

Although private, Evergrande has been “held at arm’s length for many years by Beijing,” according to Mr. Rocca.

A support which is however “not unlimited” while the Communist power tries to clean up its financial system, estimates Larry Ong, of the specialized firm SinoInsider.

Bankruptcy is “quite possible,” warns Chris Devonshire-Ellis, of consulting firm Dezan Shira & Associates.

And to recall that in 1999, Beijing did not hesitate to let go of the Guangdong Investment Trust (Gitic), a public group indebted “only” to the tune of 4.4 billion dollars.

Restructuring

The group announced last month that it was “in discussions” with investors and had not ruled out having to sell certain assets.

One of the avenues envisaged: its electric car branch, a showcase for its diversification.

Founded in 2019, Evergrande Auto aimed to revolutionize the sector and compete with the American manufacturer Tesla.

But the brand still does not sell any model and its stock market value has melted like snow in the sun.

A restructuring of Evergrande is “probable” but the outlines are difficult to define, believes analyst Chuanyi Zhou, of the research firm Lucror Analytics.

Especially since Evergrande has entered “a vicious circle”, according to Deng Haozhi, specialist in the Chinese real estate market.

Bad news about its financial health undermines buyer confidence, weighs on sales and ultimately exacerbates its cash flow problems.

The state to the rescue

Bailout Evergrande would send “a bad signal” to other heavily indebted groups, believes Larry Ong, while Beijing is trying to eradicate practices that weaken the financial system.

But a nationalization of the company remains an option, understands Mr. Deng, who adds that local communities have already taken over some real estate projects.

According to financial news agency Bloomberg, Beijing dispatched a team of financial advisers to conduct an audit of Evergrande.

The state could also take a stake in the group through state-owned enterprises, Chuanyi Zhou predicts.

Poly Property, a subsidiary of a Chinese military group and based in Hong Kong, could be among those called to the rescue, according to analysts at Saxo bank.

Objective: to avoid a bankruptcy which would penalize millions of small owners or aspiring property owners, with possible repercussions on the stability of the regime.

Larry Ong is thus betting on an “optimistic scenario” by which the authorities “would find a way to avoid bankruptcy, give creditors the hope of at least recovering something while avoiding public disturbances”.

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