October 21, 2021
Evergrande Group and China’s Debt Challenges
Concerns about China’s high debt levels intensified in
Evergrande’s overseas presence allows it to raise and
September 2021, when its second-largest property
transfer funds in and out of China. Evergrande Group and
developer, Evergrande Group, failed to repay its debt
three subsidiaries—China New Energy Vehicle, HengTen
obligations. The government of the People’s Republic of
Networks, and Evergrande Property—are listed in Hong
China (PRC or China) seeks to reduce debt and curtail
Kong. Its corporate bonds trade in Singapore, and it
market risks among firms like Evergrande, but defaults and
operates a wealth management business through its life
a decline in property values could have broader effects.
insurance subsidiary. Evergrande’s CEO controls two firms
China’s property market accounts for almost 30% of GDP,
registered in the British Virgin Islands (BVI)—Xin Xin
a higher percentage than in most countries, and thus has
(BVI) Ltd. and CEG Holdings (BVI) Ltd.—to facilitate
complicated China’s efforts to reduce debt. Property is a
offshore investments. Xin Xin has over 960 subsidiaries.
main source of local government revenue and a key factor
in corporate valuations and household net worth. This
Evergrande and China’s Debt
constrains policy options, despite China’s leader Xi
Evergrande owes about $305 billion in debt (2% of China’s
Jinping’s statements that support reducing debt and
GDP). The firm is obligated to repay $124 billion this
inequality. Declining land revenue could affect local
year—including $19.3 billion in bonds—but may only have
governments’ ability to repay loans and special bonds,
10% of this amount in cash on hand. The firm is said to owe
which Nomura Holdings estimates reached almost $7
money to 171 domestic banks and 121 financial firms. Off-
trillion (44% of China’s GDP) in 2020. China relies on
book liabilities have not been disclosed. As China’s largest
debt-financed fixed asset investment (including property)
issuer of high-yield dollar denominated debt, Evergrande
and exports for growth. Supply disruptions, energy and
was an attractive investment, despite known risks, because
commodity shortages, and industrial and property
it paid annual interest rates of 7.5% to 14 %. China’s total
overcapacity are most likely exacerbating economic risks.
debt—household, corporate, and government—reached
The situation highlights potential broader and longer-term
290% of GDP in 2020 (Figure 1), with the majority of debt
risks in China’s economy that Congress may consider as
held by companies. China has an estimated $100 billion in
U.S. financial firms seek to expand their exposure to China.
U.S. dollar-denominated debt due in 2021. Within China,
PRC firms owe an estimated $706 billion in 2021.
Evergrande Group
Evergrande Group is a state-tied property conglomerate
Figure 1. China’s Debt as Share of China’s GDP
based in Shenzhen that also operates energy, entertainment,
health, insurance, and technology businesses. The firm was
founded in 1996 when the government was liberalizing
investment in the property sector. Tax reforms in 1994 had
shifted a significant amount of local revenue flows to the
central government, prompting local governments to turn to
property sales and bond issuances for new revenue streams.
This shift increased the importance of land sales, real estate
transactions, and property values to local governments.
The Shenzhen government is a large shareholder in
Evergrande. In 2017, Evergrande moved its real estate
assets into the Hengda Real Estate firm, with plans (later
deferred) to list Hengda on the Shenzhen Stock Exchange
through a reverse takeover of Shenzhen Real Estate, a
Shenzhen government firm. Hengda sold 25 percent of its
Source: CRS with data from the Bank for International Settlements.
shares to the Shenzhen government and other state
Notes: *Government debt in nominal value. Does not include
investors. Evergrande is also tied to the central government.
The Ministry of Finance’s
financial sector debt. Comparable U.S. debt as a share of U.S. GDP
CITIC Group is a shareholder.
was 295.5% in 2020.
Moreover, in 2018, Evergrande signed a $16 billion
agreement with the central government’s China Academy
Deleveraging Efforts
of Science to invest in priority emerging technologies on its
In 2016, the Chinese government initiated a campaign to
behalf. Evergrande has acquired firms that produce electric
reign in debt accrued by banks, local governments, and
vehicles in the United States, the UK, and Sweden, and has
unauthorized lending. The effort included scrutiny of
invested in biotechnology research at Harvard University.
overseas real estate, entertainment, and sports investments.
In July 2017, People’s Daily, the Communist Party of
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Evergrande Group and China’s Debt Chal enges
China’s paper of record, published an article about financial
the government prioritized domestic creditors. Internal
risks caused by gray rhino firms, a term U.S. author
transactions among business units and executives, as
Michele Wucker coined to describe market risks that are so
well as unregistered investments may not be repaid. In
big and obvious that they are often ignored. This signaled a
its restructuring, HNA Group plans to only repay $25
government push to curtail certain firms, including Anbang
billion of $60 billion in obligations.
Insurance, Dalian Wanda Group, Fosun International, and
HNA Group. The government restructured these firms ’ debt
Investment and Accounting Methods
and aligned investments with state goals, established state
Evergrande’s U.S. auditors and underwriters signed off on the firm’s
trusteeship, and transferred assets to state investors.
investment and accounting practices for years. These practices that
In 2018, China’s leader Xi pledged to tackle financial risk
affect the firm’s financial position and which other firms may use
as one of “three tough battles.” The campaign led to several
include:
bank bailouts in 2019, but defaults fell in 2020 due to
Counting unbuilt and unsold properties and interest
pandemic stimulus and laxer rules. The government issued
payments as assets. About 60% of the firm’s assets are unbuilt
$142.9 billion of special treasury bonds, the first issue since
and unsold properties, and the firm counts loan interest
2007; increased the quota for local government special
payments as assets. This inflates the firm’s position and increases
bonds (a source of infrastructure funding); and fast-tracked
risks if property values fal .
the issuance of corporate bonds. In August 2020, the
government launched a “three red lines” policy for property
Using previously-financed deals as collateral for new
developers that sets: (1) a 70% ceiling on liability to asset
loans. This practice al owed the firm to accumulate debt and
become leveraged. The People’s High Court of Hainan Province
ratios; (2) a 100% cap on net debt to equity ratio; and (3) a
determined that HNA affiliates provided mutual guarantees for
cash requirement to cover short-term liabilities. Since April
2021, the government has restricted and restructured Ant
repayments, a practice that the Swiss government determined in
Financial’s lending business, and asserted control, with
2019 that HNA used in its global acquisitions and operations.
state firms taking stakes in the company.
Investing in unrelated sectors beyond the core business.
Traditional Approaches to Corporate Risk
Some PRC firms use insurance, trust, and wealth management
businesses to earn higher returns and invest offshore. The
The PRC government so far is using a traditional toolkit to
Shenzhen government is investigating Evergrande's insurance
rein in risky activity while trying to avoid market contagion
business.
and moral hazard, a tendency toward riskier behavior when
someone else bears the risks. The government benefits from
Use of complex offshore structures tied to the CEO.
a closed capital account, but the size of Evergrande’s
Evergrande uses overlapping contracts and shareholding to
exposure (including secondary exposure) could complicate
facilitate financial flows that make it difficult to assess liabilities.
this approach, weaken confidence, and raise debt levels.
The CEO and his family reportedly hold a large share of the
firm’s offshore debt. In March 2021, a Hainan court ruled that
Commercial bankruptcy is a policy choice prompted
HNA’s 320 affiliates should be merged because: (1) relationships
by government actions. Evergrande’s debt crisis
and shareholding were too confusing to disaggregate; (2) internal
arguably was triggered by government restrictions on its
controls were fictitious; (3) internal credit and debit dealings
ability to raise new funds to pay its debt obligations,
were impossible to align; and (4) shel companies were used
exposing its highly leveraged position. Tightening of
extensively.
domestic housing policies also weakened the market and
the position of Evergrande and other property firms.
Issues for Congress
Restructuring assets and shareholding aims to
stabilize operations and avoid a direct bailout. The
Evergrande’s situation raises questions about the full scope
PRC government is a shareholder in Evergrande and
of its liabilities and the potential direct and indirect
many other firms it investigates or restructures. The
exposure for U.S. and other firms. The role of U.S. and
government typically directs state investors to acquire
other underwriters and auditors of Chinese firms also raises
assets and shareholding positions to cover liabilities and
questions about whether risks are sufficiently assessed and
reposition troubled firms, at times realigning winners
disclosed to investors. Other questions include:
and losers within China’s system. In 1999 and 2003, the
How common are Evergrande’s accounting and
government created large asset management companies
investment practices among other PRC firms?
to offload pervasive non-performing loans in the state
What do government restructuring efforts show
banking sector. In 2012, the government directed firms
about the role of the state in China’s companies?
to prop up the Shanghai Stock Exchange. The Shenzhen
Are there risks of Chinese government overreach
government has intervened to support Evergrande in the
or miscalculation?
past. State investors are now investing in the firm and its
How open, transparent, and accountable are
subsidiaries, and are assuming some of its liabilities.
China’s financial markets to U.S. investors? Do
U.S. investors have the same rights in China that
Creditors may not be repaid equally. It is uncertain to
PRC investors have in the United States?
what extent China will allow losses on Evergrande’s
creditors and preferential repayment terms for certain
Karen M. Sutter, Specialist in Asian Trade and Finance
domestic creditors. Some analysts expect the Chinese
Michael D. Sutherland, Analyst in International Trade and
government to prioritize domestic retail investors,
Finance
suppliers, contractors, and banks. With the collapse of
the Guangdong Investment Trust Corporation in 1999,
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Evergrande Group and China’s Debt Chal enges
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