Implications of the Collapse of China Evergrande in Restricted Asian Markets
The Evergrande Group is the largest property development group in China by revenue. It is rated eighteenth on the Fortune Global 500 list. It is primarily involved in the construction of residential, shopping and commercial projects in China’s biggest cities. It is primarily domiciled in the Cayman Islands, which it headquarters and is involved in financing, developing and marketing.
This article will briefly describe Evergrande, one of China’s most profitable property developers. At the time of writing this article it has acquired another real estate project, the Palm Hills Central Park, near Macau. The purchase of the park means that Evergrande now has five projects in China; the Wuyuan Bridge, Huangdichei, Huangpu, Yuanyangdaq and the Macau New Town project. This is a very significant development in China’s property markets as previously there were only two property developers with more than one project in China.
Evergrande is a company registered in China with its shares traded on the margin and listed on the AMEX. The primary business of Evergrande is to finance projects in China’s cities, mainly in Beijing and Shanghai. The construction and development projects undertaken by Evergrande have made excellent use of financial markets to attract investment from international real estate investors. The purchase of the palm fringed park signifies that the company has seen a substantial increase in business in China and that the Chinese financial markets are providing the financing required to finance this acquisition.
Evergrande is also involved in a number of commercial activities. It has a number of joint ventures and partnerships across China, including joint venture activities in areas such as electric vehicles and other industrial sectors, with other Chinese property developers. Another company of similar profile is the JV partner of Evergrande, which is a huge Chinese company with its main office in China’s eastern region.
The acquisition of the stake in Evergrande by JV partners of the former HSG PLC to form Evergrande-HSG is another indicator of the increasing importance of the Chinese government in ensuring that the local economy is stimulated through investment. It is ironic that the Evergrande Group is an excellent example of how a large Chinese firm like Evergrande can be bought by a foreign funding company without any involvement by the Chinese government in terms of subsidies or direct financial help. Although there is a possibility of direct financial backing for HSG, the acquisition of the non-core business assets by JV partners of Evergrande shows that investors are relying on indirect channels to meet their investment objectives. Evergrande-HSG is another good example of how the Chinese government is increasingly putting its weight on indirect channels such as the sale of stakes in companies. Although the acquisition of Evergrande by JV partners was originally done as part of the strategy to raise funds for the ever-growing debt of Evergrande, it has given other signs that the Chinese government is looking at other ways to pump capital into the economy.
Recently, the Chinese government offered subsidies to more companies listed in the Beibuile group of companies. Beibuile is part of the HSG group and Evergrande is now known as Evergrande-Beibuile. Although there was no mention of subsidies in this article, this development could mean that the Chinese government will look to inject more cash into the economy by offering subsidies to more companies listed in the Beibuile group. As it stands now, China’s State Council for Finance and the Ministry of Finance are tight on liquidity and have not issued any stimulus grants or bank loans to encourage the release of equity. This could mean that there will be an increase in equity financing activity and that the overall level of liquidity is likely to rise.
If the recent slowing of the Chinese economy is repeated over the next couple of years, we can expect a significant slowing in financing activities for the real estate sector. The slowing of the economy will reduce demand for raw materials, meaning that prices in China will rise, but then fall back as the price level is passed through the ever-greater Chinese property gap. This phenomenon will further deplete the capital stocks of domestic companies and reduce liquidity. When this happens, the pressure on the banks and brokerage firms to refinance mortgages and release equity will become even greater and this will lead to a further decline in the value of the stock, which will result in another decline in property prices across Asia. So, although the Chinese government has taken a number of actions recently to support the economy, a simultaneous collapse of the stock market and a slump in property prices across Asia are more than likely.