That is the main question troubling markets in Asia and elsewhere at present.

And it is perhaps a question only President Xi Jinping in China can answer.

China Evergrande Group is a Fortune Global 500 China-based property conglomerate which has diversified into eight major industries, including automobile manufacturing, film and TV production, theme parks, healthcare and food production. In the property sector, it owns more than 1,300 projects in over 280 cities in China.

For students of Australia's 1980s corporate excess, think Alan Bond and Bond Corporation, just on steroids.

Evergrande has around USD 300 billion of debt to 171 domestic banks and 121 other financial firms and is facing looming interest payments on its bank loans and bonds and a collapsing share price. Protests have taken place outside its offices in China.

The level of Evergrande's debt is around three times the national debt of New Zealand.

Recently, Evergrande has been borrowing money from its employees to stay afloat (apparently telling employees to lend it cash or lose their bonus) and offering properties (including car park spaces) in satisfaction of its debts. Rumours abound that local creditors will be paid in full while foreign creditors will be required to take haircuts.

Any restructuring would be a complex affair. Bondholders are already establishing creditors committees to engage in discussions with Evergrande. Creditors may agree to defer interest payments and rollover loans although this would seem to just delay some form of inevitable restructuring.

Ultimately, despite discouraging government bailouts, the Chinese Government may step in and organise an orderly sell down of assets. This would be driven by a need to ensure market stability and may involve selling off non-core assets - Evergrande has apparently already been completing asset disposals - and hiving off other assets into a workout vehicle. A split between Evergrande and a bad asset vehicle, probably not named "Not So Grande".

With China's current crackdown on wealthy entrepreneurs and its tightening of restrictions on indebted developers, founder Hui Ka Yan will need to rely on his Party connections to determine if he has a role going forward. This assumes President Xi does not decide to use Evergrande as an example of how capitalism goes wrong. If so, the founder's prospects of remaining involved in Evergrande seem slim.

What Is China Evergrande and Why Is It In Trouble?

September 2021

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