The Evergrande saga marks the end of China's long property boom

Back in 2017, billionaire Xu Jiayin was on a roll. He was crowned China's richest man with a net worth of US$42.5 billion and his flagship China Evergrande Group was lauded as one of the world's largest home builders with total assets of 2.1 trillion yuan (US$325 billion).

He harboured even greater ambitions: Xu started to dream about taking on Elon Musk and, in 2019, he announced a vision that China Evergrande would invest 45 billion yuan to build the world's largest maker of electric vehicles within three or five years, just like he had started to build his property empire from scratch in 1996.

His cocky business slogan of "buy, buy, buy" was further illustrated that year by the high-profile announcement that he paid an economist an annual salary of 15 million yuan to embellish and trumpet his vision.

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Merely four years later, China Evergrande is now being dismissed as the world's most indebted property developer, with US$300 billion in liabilities, and is on the brink of collapse. And his electric car unit has not sold a single car, contrary to the plans for a roll-out this year. Share prices of the Hong Kong-listed China Evergrande and its car unit have plunged nearly 90 per cent.

Worries about the contagion effects have again spooked global investors who are not only concerned about China's highly leveraged property sector but also its overall economic health as the housing market - including real estate development and related industries from steel to cement - accounts for 25 to 29 per cent of China's GDP, by some estimates.

Some analysts have labelled the Evergrande saga as China's "Lehman moment", referring to the collapse of the US investment bank Lehman Brothers which led to the Global Financial Crisis in 2008.

This makes great headlines but the analogy is flawed. On Wednesday, US Federal Reserve Chairman Jerome Powell appeared to have dismissed that analogy by suggesting Evergrande's debt problems seemed peculiar to China and he did not see a parallel to the US corporate sector, Reuters has reported. Powell noted that major Chinese banks were "not tremendously exposed" and the Chinese government had put new strictures in place for highly leveraged companies.

His remarks seem to have calmed the stock markets as Hong Kong's main Hang Seng Index rebounded strongly on Thursday.

For Xu's part, he told company staff on two separate occasions in the past week that he believed that the company would step out of its darkest moments soon and urged all-out efforts to resume construction and delivery of flats to end users.

By all accounts Evergrande's restructuring is inevitable but how soon and in what ways it will take place will depend on interventions from the Chinese government.

So far, Chinese officials have remained eerily silent and major state media have scarcely mentioned the Evergrande story, even though the financial press have started to run commentaries urging the government to prevent the company from dragging down the entire property sector. On social media, trending videos purportedly showed investors in wealth products issued by Evergrande and buyers of off-the-plan flats gathering at Evergrande's headquarters and some of its construction sites.

The government's silent treatment of the Evergrande saga may surprise some investors but it speaks volumes and suggests Beijing plans to take advantage of the crisis to finally rein in excessive leverage in China's property market.

Xu reportedly said he now regretted the ambitious expansion plans he mapped out in 2017, suggesting that he misread China's economic and policy directions. For a politically well-connected billionaire, that is very revealing. The writing has been on the wall since the end of 2016 when Chinese President Xi Jinping came up with the catchphrase "houses are for living in, not for speculation", which was followed by a continuous flow of measures to tighten the housing market.

Xu's exuberance in 2017 came as another property giant, Wanda, and Hainan Airlines were forced to sell overseas assets and domestic investments in a deleveraging campaign to defuse financial risks.

Before 2017, Wanda and its chairman Wang Jianlin were the darlings of international and domestic investors, with Wang ranked as the richest Chinese tycoon in the Forbes list several years in a row.

Some cynics have long held that Xu's ambitious expansion plans in 2017 went far beyond simply misreading the way the political winds were blowing. He may have held false hopes that debt-fuelled growth would make Evergrande too big to fail. His high-profile plunge into the already crowded electric car business, despite having no relevant technology or experience, may have well been a carefully thought-out gambit to keep banks and investors lending money to his entire business empire.

But Xu's grand strategy started to unravel in August last year when the government rolled out the policy of "three red lines" to restrict further borrowing by property developers. These comprised liability-to-asset ratios of no more than 70 per cent, net-debt-to-equity ratios of no more than 100 per cent, and a cash-to-short-term borrowing ratio of at least one.

Soon after the policy announcement, a letter circulating online showed Evergrande had sought support from Guangdong provincial government for a corporate restructuring and warned that failure to do so would trigger a chain of risks in the financial system. At that time, Evergrande denied the authenticity of the letter.

For the moment, the Chinese government appears content to allow Evergrande to sort out its own mess but it is under increasing pressure to intervene to avoid a liquidity crisis and contain financial and economic disruption. Moreover, Evergrande's failure to deliver flats to buyers on schedule could turn into a social instability issue for the government. Evergrande's impending restructuring will finally mark the end of China's long property boom.

Wang Xiangwei is a former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper

This article originally appeared on the South China Morning Post (SCMP).

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