Updated April 8, 2024
Evergrande Group and China’s Debt Challenges
Since 2021, some Members of Congress have raised
Kong. It trades corporate bonds in Singapore and operates a
concerns about the People’s Republic of China (PRC or
wealth management business through a life insurance firm.
China)’s debt levels and the solvency of PRC property
Evergrande’s CEO controls two firms registered in the
developers. The inability of Evergrande Group, China’s
British Virgin Islands (BVI)—Xin Xin (BVI) Ltd. and CEG
second largest property developer, to repay its domestic and
Holdings (BVI) Ltd.—to facilitate offshore investments. Of
foreign debt highlights issues related to the structure and
its more than 500 subsidiaries, Evergrande named 170
operations of PRC firms in China and offshore, and the role
“principal” subsidiaries in its 2022 annual report.
of the state in PRC firms, generally and in times of crisis.
Evergrande’s Debt and Restructuring
While U.S. firms’ direct exposure to Evergrande is about
In 2021 Evergrande was unable to repay $305 billion (2%
$348.4 million, according to Bloomberg, the case raises
of China’s GDP) it owed to PRC and foreign creditors. That
broader issues for Congress, including: (1) foreign creditor
figure did not include off-book liabilities. In January 2024,
rights in PRC corporate restructurings; (2) potential opacity
a Hong Kong court ordered Evergrande to liquidate assets
and risks in how PRC firms are structured, operate, and
tied to its Hong Kong unit after a failed restructuring deal
report; and (3) potential risks in China’s economy.
among PRC banks and foreign creditors. Hong Kong’s
Congress directed U.S. audit oversight of and reporting
court ruling does not govern the firm’s PRC subsidiaries,
requirements for PRC firms in P.L. 116-222, and is
which constitute 90% of its business. Since 2021, the firm’s
considering other U.S. investor protections, reporting
PRC assets have been mostly redistributed to domestic
requirements for PRC firms, and restrictions on certain
creditors, particularly local governments. In 2021, Hong
U.S.-China trade and investment activity. For related issues
Kong and PRC authorities agreed to mutually recognize
before Congress, see CRS In Focus IF11667, China’s
liquidation orders in a trial that is not in Shenzhen where
Economy: Current Trends and Issues, CRS In Focus
Evergrande is based. In March 2024, PRC securities
IF11803, U.S. Capital Markets and China: Issues for
regulators fined the firm over $500 million and banned its
Congress, CRS In Focus IF12212, U.S.-China Auditing
founder from financial markets for fraudulent accounting
Agreement and Issues for Congress, and CRS In Focus
and reporting. According to Bloomberg, as of 2024 the firm
IF11284, U.S.-China Trade Relations.
owed $300 billion in debt (including $20 billion in offshore
Evergrande Group
debt) and held about $240 billion in assets. U.S. firms hold
about $348.4 million (1.5%) of the firm’s $23.2 billion in
Evergrande is a state-tied property conglomerate based in
foreign corporate debt.
Shenzhen that also operates energy, entertainment, health,
insurance, and technology businesses. It was founded in
PRC Debt and Deleveraging Efforts
1996 when the government was liberalizing property sector
PRC total debt—household, corporate, and government—
investment. Tax reforms in 1994 had shifted a large amount
reached 297% of GDP in 2022 (Figure 1), with the
of local revenue flows to the central government, prompting
majority of debt held by companies. (PRC firms owe an
local governments to turn to sales of land-use rights and
estimated $945.5 billion in bond payments in 2024). Local
bond issuances for revenue. This shift raised the importance
governments had $7.6 trillion in interest-bearing debt raised
of property transactions and values to local governments.
through finance vehicles as of 2022, according to a Peking
University study. In January 2024, the PRC government
The Shenzhen government is a major shareholder in
restricted the issuance of 364-day offshore bonds to close a
Evergrande. In 2017, Evergrande moved its real estate
gap that local governments had been using to raise funds.
assets into Hengda Real Estate Group Co., Ltd., with plans
(later deferred) to list Hengda on the Shenzhen Stock
Figure 1. China’s Debt as Share of China’s GDP
Exchange through a reverse takeover of Shenzhen Real
Estate, a government firm. Hengda sold 25% of its shares to
the Shenzhen government and state investors. Evergrande is
also tied to the PRC central government. The Ministry of
Finance’s CITIC Group is a shareholder. In 2018,
Evergrande signed a $16 billion agreement with the China
Academy of Science to invest in foreign technologies on its
behalf; it acquired electric vehicle firms in the United
States, the United Kingdom, and Sweden, and invested in
biotechnology research at Harvard University.
Evergrande’s overseas presence allows it to raise and
transfer funds in and out of China. Evergrande and three of

its subsidiaries—China New Energy Vehicle, HengTen
Source: CRS with data from the Bank for International Settlements.
Networks, and Evergrande Property—are listed in Hong
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Evergrande Group and China’s Debt Challenges
Notes: *Nominal value. Data does not include financial sector debt.
firms, at times realigning winners and losers within China’s
U.S. debt as a share of U.S. GDP was 255.6% in 2022.
system. In 1999 and 2003, the government created large
China relies on debt-financed fixed asset investment
asset management companies to offload pervasive non-
(including property) and exports for growth. The property
performing loans in the state banking sector. In 2023 and
market accounts for about 30% of China’s GDP, a higher
2024, the PRC government directed a “national team” of
percentage than in most countries, according to the
state firms to purchase stocks to boost PRC capital markets,
International Monetary Fund (IMF). Reliance on the
as it did in 2012 and 2015. The Shenzhen government and
property sector for growth constrains PRC efforts to reduce
other state investors had previously supported Evergrande
debt without broader economic effects. Property is a main
through investment and assumption of its liabilities.
source of local government revenue and factors into
Creditors may not be repaid equally. The PRC
household net worth and corporate valuations. Declining
land revenue affects local governments’ ability to repay
government typically prioritizes repayment for domestic
retail investors, suppliers, contractors, and banks and may
debt. In 2022, local government debt reached about $12.6
not require repayment of unregistered investments and
trillion (76% of GDP), according to the IMF.
internal corporate transactions (among business units and
In 2016, the PRC government initiated a campaign to rein
executives). In 1999, after the collapse of the Guangdong
in corporate and local government debt and unauthorized
Investment Trust Corporation, the government prioritized
lending. This included scrutiny of overseas real estate,
domestic creditors. HNA Group repaid $25 billion of its
entertainment, and sports investments. In July 2017,
$60 billion in obligations during restructuring.
People’s Daily, the Communist Party of China’s paper of
Investment and Accounting Practices
record, published an article about financial risks caused by
gray rhino firms, a term Michele Wucker coined to describe
Investment practices commonly used by PRC firms
risks that are ignored because they are so large and visible.
contributed to Evergrande’s highly leveraged situation.
The article signaled a government push to rein in certain
Counting unbuilt and unsold properties and interest
firms (e.g., Anbang Insurance, Dalian Wanda Group, Fosun
payments as assets. About 60% of the firm’s $240 billion
International, and HNA Group). The government realigned
in assets are unbuilt and unsold properties, and the firm
these firms’ investments with state goals, transferred assets
counts loan interest payments as assets. This inflates the
to state investors and established related state trusteeship.
firm’s position and increases risks if property values fall.
In 2018, the PRC government pledged to tackle financial
Using previously-financed deals as collateral for new
risk as one of “three tough battles,” and in 2019 bailed out
loans. This practice allowed the firm to accumulate debt
several banks. In 2020, it launched a “three red lines”
and become leveraged. In the case of HNA, the People’s
policy for property developers that sets: (1) a 70% ceiling
High Court of Hainan Province determined that its affiliates
on liability to asset ratios; (2) a 100% cap on net debt to
provided mutual guarantees for repayments. In 2019, the
equity ratio; and (3) a cash requirement to cover short-term
Swiss government charged HNA with using this practice to
liabilities. In 2021, the government became a shareholder,
fund in its global acquisitions and operations.
reined in the lending operations of Ant Financial and
Investing beyond the core business. Some PRC firms use
Tencent, and later in 2023 issued rules to regulate digital
platforms’
insurance and wealth management firms to invest offshore.
nonbank lending more generally.
Use of complex offshore structures tied to the CEO. To
Local governments funded pandemic efforts, placing
facilitate financial flows offshore, PRC firms often use
further stress on their balance sheets. In response, Beijing
overlapping contracts and shareholding that can make it
has eased restrictions on the ability of firms and local
difficult to assess liabilities. Evergrande’s CEO and his
governments to raise debt financing. In 2020 it issued
family reportedly hold a large share of the firm’s offshore
$142.9 billion of special treasury bonds, the first issue since
debt. In March 2021 a Hainan court merged 320 of HNA’s
2007, and fast-tracked corporate bond issuances. In 2023,
affiliates because: (1) it could not disaggregate complex
an increased quota for special bonds allowed local
relationships and shareholding; (2) internal controls were
governments to raise over $21 billion, proceeds they mostly
fictitious; (3) internal credit and debit deals were impossible
used to stabilize local banks.
to align; and (4) shell companies were used extensively.
PRC Approaches to Corporate Risk
Options for Congress
The PRC government has sought to rein in PRC firms and
Congress has options to further explore Evergrande’s
avoid broader market effects. PRC restrictions on capital
situation and broader issues such as U.S. investment
flows have contained some risks, but property firms’ large
exposure to China, PRC firms’ complex structures, state
market exposure complicates these approaches:
ties to PRC firms, and related risks. Congress might require
PRC government actions can trigger firms’ bankruptcy.
a study to ascertain 1) the extent to which PRC firms use
Evergrande’s debt crisis followed government restrictions
Evergrande’s investment practices, accounting methods,
in 2021 that constrained its ability to raise new funds to pay
and corporate structures, and 2) how such approaches affect
its extensive debt obligations. Tightening domestic housing
the use of U.S. authorities regarding PRC firms. Congress
policies arguably also weakened Evergrande’s position.
also could ask the Securities and Exchange Commission
and the Treasury Department to regularly report on U.S.
Restructuring assets and shareholding avoid direct
aggregate exposure to China’s economy and PRC firms
bailouts. The PRC government is a shareholder in
(including PRC firms registered offshore), and any risks.
Evergrande and other firms it investigates or restructures. It
often directs state investors to acquire assets and become
Karen M. Sutter, Specialist in Asian Trade and Finance
shareholders to cover liabilities and reposition troubled
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Evergrande Group and China’s Debt Challenges

IF11953
Michael D. Sutherland, Analyst in International Trade and
Finance


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https://crsreports.congress.gov | IF11953 · VERSION 3 · UPDATED

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