TAICANG, China — The one-bedroom apartment was to be Penelope Wu's retirement home, an escape from the bustle of Shanghai — or, at least, that's how Evergrande, the Chinese property developer, painted it. To jump in line ahead of hundreds of other prospective homebuyers, Wu paid the sticker price of about $200,000 in full last year, before construction had even broken ground.
"It did strike me as weird that Evergrande wanted the cash up front. I did not know then that they were so desperate for money," Wu says as she walks her dog outside her uncompleted building in Taicang's Cultural City project. The mixed-development project, an hour's drive from Shanghai, has been halted mid-construction as Evergrande scrambles to pare down its debt under orders from Chinese regulators.
Wu and the buyers of an estimated 1.4 million Evergrande units all over China are now uncertain whether the properties they paid for will ever be built.
Dozens of angry and worried investors have picketed Evergrande's headquarters in the southern city of Shenzhen for weeks. They bought investment products from Evergrande that now look nearly worthless, as its Hong Kong-listed stock plummeted by nearly 90% in value this year.
Evergrande is set to default on at least one tranche of bond interest payments totaling around $120 million, due at the end of September. (It said on Wednesday that it had "resolved" one payment of more than $35 million on onshore bonds but has a second payment of more than $85 million on offshore bonds coming due on Thursday.)
The embattled developer, China's second biggest by sales volume last year, is saddled with debt it cannot pay back: It owes a total of $368 billion in loans to banks, as well as liabilities to contractors and suppliers.
The financial woes of the once mighty developer highlight a showdown between two competing objectives for China's Communist Party: force China's private sector away from speculative and risky lending practices that pushed debt to dangerous levels, while avoiding a financial meltdown and the collapse of the property sector, in which more than 70% of the nation's urban wealth is locked up.
"This is a part of long-term fiscal reform to de-risk, deleverage, and to shift away from [local government] land financing. These two goals are a good thing," says Bo Zhuang, the chief China economist at Loomis Sayles, an investment firm. "But there's a risk of further spillover to other developers, potentially causing a banking crisis or debt crisis."
The company has engaged in risky practices for years
For nearly three decades, Evergrande — like dozens of Chinese developers — bet big on China's booming infrastructure buildup. It took out loans that often carried double-digit interest rates and gambled that its sales of yet-to-be-built apartments would be high enough to service ballooning debt.
Financial regulators tolerated these risky lending practices because of how developers such as Evergrande helped generate huge amounts of property wealth, as well as land sale revenues for local governments, while turning millions of citizens into homeowners.
Evergrande also embraced innovative ways to finance its ever growing debt, selling financial products to retail investors and occasionally to its own employees. It remained solvent even as its debts multiplied. Xu Jiayin, Evergrande's chairman, was ranked China's richest man in 2017 as Evergrande's stock price soared.
"Evergrande has always been able to postpone the sort of day of pain, and in the meantime, the share of nonperforming assets on the balance sheet have just got bigger and bigger, and in a sense, the problem has got bigger and bigger," says Nigel Stevenson, a Hong Kong-based analyst at GMT Research who has tracked Evergrande for years.
This time, Evergrande's problems look too big to ignore
In Taicang's Cultural City, Evergrande's stalled tourism and residential project, optimism prevails among some real estate agents and homebuyers that the developer will once again secure enough last-minute financing or receive an extension on outstanding loans to continue operating.
"Evergrande is too big to fail," says Mao Kai, a Taicang real estate agent.
Wu, the homebuyer, trusts that the municipal government will step in to bail out Evergrande's local projects or at least make sure the developer finishes building the homes it has already sold.
"There is just too much money and too many houses on the line to let a firm the size of Evergrande go belly up. A bankruptcy would create too many social problems," she says.
This time around, Evergrande's problems may be too big to ignore. The Chinese state has strongly indicated it will no longer allow developers like Evergrande to take out loans it cannot pay back and sell investment apartments no one needs just to raise housing prices.
Policymakers have also signaled that they will push local governments to reduce their financial dependence on selling land for revenue — one of the key drivers behind China's property boom.
An economic slowdown brought on by the COVID-19 pandemic was already dragging down property purchases. Then, last summer, new government policies to curb speculative investments restricted the number of homes people could purchase. These rules took some buyers by surprise.
"We only learned of the new limits after my mother had already signed a contract with Evergrande. If the company knew of the rules at the time, why did they have us pay for the apartment?" says one Shanghai resident whose mother bought a unit in Evergrande's Taicang project while already owning a second home in the city. Her purchase is illegal under the new rules, which is why the resident asked that NPR not use his name. He is now trying to claw back his mother's down payment.
A day of reckoning?
Last year, Beijing also implemented its "three red lines" policy, the number referring to three strict caps placed on the ratio of debt a property developer can hold in relation to its assets, equity and cash on hand.
Under this combination of new rules, Evergrande could not sell enough apartments fast enough to pay back its debts at the pace mandated by regulators.
"It does now look as though the day of reckoning is sort of fast approaching," says GMT's Stevenson.
One question is whether pushing Evergrande to shape up may actually destabilize the whole Chinese banking system. Buyers are so spooked over Evergrande that other developers are now seeing falling property sales and plunging stock prices, potentially setting off more property defaults in China. Global stock markets have been roiling from the uncertainty as well. This month, the Dow Jones Industrial Average had its worst performance since July, and the S&P 500 and Nasdaq composite were at their lowest since May.
"Household confidence in buying new property is deteriorating really fast," says Zhuang, of Loomis Sayles.
The fallout is already apparent
Government regulators are now trying to find other companies that can buy out Evergrande and its assets before its woes spread. But they are running out of time to contain the potential economic fallout.
That is because Evergrande does not only owe loans to banks. It also has unpaid bills totaling about $300 billion owed to contractors and suppliers — which are now also facing economic hardship.
One of these contractors is construction company Jiangsu Nantong Sanjian, which was supposed to finish Evergrande's Taicang project, in addition to dozens of others across the country.
"The last two days have been filled with endless fights with the police and with desperate homebuyers. Evergrande has no money to pay us back, so we are also fighting with renovators and other contractors we hired," says Sheng Weixin, a manager at Jiangsu Nantong Sanjian.
Ashen faced with worry, he sits alone at his desk in the middle of an empty construction lot in Taicang, trying to figure out his own future. He sent all his employees, many of them migrant workers, home in August because he could no longer afford to pay them.
"What do we do about all our workers, the people of the countryside? We still owe them three months of salary," says Sheng.
He points out the concrete and steel skeletons of almost a dozen unfinished Evergrande projects nearby — one of which another developer agreed to take over in July, only to face debt issues itself.
Lacking a payout from Evergrande or a state bailout, Sheng predicts his own company will likely go bankrupt in a few months. "This," he says, "is no laughing matter."
AUDIE CORNISH, HOST:
A property developer in China could be going bankrupt. And that may not sound like a big deal, but NPR's Emily Feng reports the firm is at the center of so much debt, its collapse could set off a chain reaction of defaults.
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EMILY FENG, BYLINE: I'm standing in a half-finished villa. The marble floors are covered in dust. And while the chandeliers have been put in already, the entire mansion is still missing its doors. The house is part of the Taicang Cultural City project, and it was being built by Evergrande, one of China's biggest real estate developers. But now construction has halted.
MAO KAI: (Speaking non-English language).
FENG: Mao Kai, a real estate agent, tells me all the units are sold, though it's not clear whether they will ever be finished. Buying property is everything in China. It's used as a dowry for marriage and is a ticket to accessing the best public schools. And it's generated huge returns for the middle class. More than 70% of urban wealth is in property. That's why Shanghaier (ph) Penelope Wu and her husband splurged for a $200,000 one-bedroom Evergrande apartment here. There was so much competition last year, she offered to pay the total cost up front in cash before Evergrande even broke ground.
PENELOPE WU: (Through interpreter) I didn't know then that Evergrande was so desperate for money. Oh, well. Buying property's like betting on stocks. You win some, and you lose some.
FENG: Now she's waiting for Evergrande to finish building her apartment, along with as many as 1.4 million other units the developer pre-sold. But the developer has no more money to continue building. Wu trusts the government will step in to save Evergrande or at least make sure it finishes building the homes it's already sold.
WU: (Through interpreter) Evergrande is too big to fail. Even if it did go bankrupt, the government would step in to save it.
FENG: Angry and worried investors are already picketing Evergrande's headquarters. They bought investment products from Evergrande that now look worthless as its stock lost nearly 90% in value this year.
NIGEL STEVENSON: Well, it does now look as though the day of reckoning is sort of fast approaching.
FENG: Nigel Stevenson is a Hong Kong-based analyst at GMT Research, and he's tracked Evergrande for years. It became one of China's biggest developers by playing a risky game, selling bonds and borrowing money at double-digit interest rates to finance new projects, which it then sold just in time to pay back debts and take out new loans.
STEVENSON: So it's always been able to sort of postpone the sort of day of pain in a sense. And in the meantime, the sort of assets and the balance sheet had just got bigger and bigger. And in a sense, the problem has got bigger and bigger.
FENG: The problem started early this year. COVID slowed property purchases. New policies restricted how many homes people could buy, and much stricter caps on how much debt property developers could take on were enforced. Here's Bo Zhuang, chief China economist at investment firm Loomis Sayles.
BO ZHUANG: It's part of the long-term China's like de-leverage, de-risking. Beginning of this year, it was, like, very stringently implemented. So that's the key factor.
FENG: This is what the Chinese state wants. It's tired of risky developers like Evergrande taking out loans it cannot pay back and selling apartments no one needs just to raise housing prices. So China is forcing Evergrande and others to pay down debts. Next, it wants local governments to reduce their financial dependence on selling land for revenue. The question is, could pushing Evergrande to shape up actually destabilize the whole economy?
ZHUANG: In Chinese say that killing chicken to scare the monkeys - but the thing is that they are maybe trying too hard to kill the chickens, but all the monkeys are scared away.
FENG: There's a chance Evergrande will miss bond interest payments this month, and buyers are so spooked over Evergrande, other developers are now seen falling property sales and plunging stock prices, potentially setting off more defaults.
ZHUANG: Household confidence in buying new property - (unintelligible) that presale property - is deteriorating really fast. If my mom knows Evergrande story, it means that everybody knows the Evergrande story.
FENG: Evergrande doesn't just owe loans to banks. It also has liabilities, as in unpaid bills totaling about $370 billion it owes to contractors and suppliers who could also go belly up if Evergrande defaults. One of these contractors is Nantong Sanjian, which was supposed to finish Evergrande's Taicang project. Here's one of its managers Sheng Weixin.
SHENG WEIXIN: (Though interpreter) The last two days have been filled with endless fights with the police and with desperate homebuyers. Evergrande has no money to pay us back, so we're also fighting with renovators and other contractors.
FENG: Sheng is ashen-faced with worry. He's already sent all his workers home because he can't afford to pay them.
SHENG: (Though interpreter) We still owe our workers three months' salary. Our own business is likely to get pulled into bankruptcy as well.
FENG: Sheng points out the concrete and steel skeletons of nearly a dozen unfinished Evergrande projects around us.
SHENG: (Non-English language spoken).
FENG: He waves to a cluster of towers to our east, which another developer agreed to bail out in July, only to face debt issues themselves. Government regulators are now seeing if any other developers can buy out Evergrande before its financial woes spread across China's property sector. But they're looking shaky, too, and Beijing is running out of time to contain the economic fallout.
Emily Feng, NPR News, Taicang, China. Transcript provided by NPR, Copyright NPR.