China Evergrande Files for Bankruptcy Protection... Real Estate Bomb 'Tick Tock'

Evergrande Group, which triggered the Chinese real estate crisis, has filed for bankruptcy protection in a U.S. court. Facing difficulties in raising funds to repay debts, the company is seeking to buy time. However, even if the court accepts Evergrande's application, repayment of funds is expected to remain challenging. As the crisis in the Chinese real estate market spreads to the financial market and the broader economy, attention is focused on the developments of the Evergrande situation.

[Image source=Yonhap News]

"Avoiding Seizure" Evergrande Seeks to Buy Time
Global Economic Downturn Compounds Fundraising Difficulties

According to foreign media including Bloomberg on the 17th (local time), Evergrande filed for 'Chapter 15' bankruptcy protection in a New York court on the same day. Chapter 15 is a regulation that protects foreign companies undergoing restructuring from debt repayment demands and lawsuits by creditors within the United States.

Evergrande affiliate Tianhe Holdings also filed for bankruptcy protection together. In its petition, Evergrande requested recognition of ongoing restructuring negotiations in Hong Kong, the Cayman Islands, and the British Virgin Islands. Creditors are scheduled to vote on whether to approve the restructuring negotiations within this month, and Evergrande explained that approval from the courts in Hong Kong and the Virgin Islands could be obtained in the first week of next month. The court hearing is scheduled for the 20th of next month.

If the court accepts Evergrande's application, the company will be able to protect its assets, including real estate in the U.S., and buy time to avoid forced seizures by creditors. Modern Land China, a Beijing-based developer, also filed for Chapter 15 after announcing a $250 million (approximately 335 billion KRW) debt repayment application and offshore debt restructuring efforts last year.

However, even if Evergrande's bid to buy time is approved, raising funds to extinguish the urgent fire remains difficult. Recently, Evergrande's electric vehicle subsidiary, Evergrande New Energy Vehicle Group, raised $500 million from Dubai electric vehicle company NWTN. NWTN agreed to purchase 27.5% of the company's shares. But this is insufficient to repay the previously disclosed $330 billion debt.

Evergrande is a representative real estate developer that rapidly grew riding the Chinese real estate boom in the 1990s, expanding enough to be ranked globally in the mid-2010s. However, the situation worsened when the Chinese government tightened financial regulations on real estate companies in 2021. The so-called 'three red lines'?which restrict fundraising if a company fails to meet some or all of the conditions of asset-liability ratio below 70%, net debt ratio below 100%, and cash ratio against short-term debt above 1?became a stumbling block. With liquidity warning signs flashing, Evergrande's losses over 2021-2022 reached 580 billion yuan (approximately 107 trillion KRW). Stock trading was even suspended in March last year.

[Image source=Reuters Yonhap News]

Crisis Sentiment Spreads from Private to State-Owned Sector
Acceleration of Developer Nationalization?

Evergrande's bankruptcy protection filing came amid rising concerns in the real estate market, with private developer Country Garden (Biguiyuan) increasing fears of default, and real estate trust company Zhongrong International Trust unable to return investment funds to investors on time due to financial difficulties.

Experts see a high possibility that the real estate-triggered crisis could threaten the entire Chinese economy. The real estate crisis is likely to expand from the private sector to state-owned enterprises supported by the government. According to Bloomberg, among 38 state-owned construction companies listed in Hong Kong and mainland China, 18 reported preliminary losses in the first half of this year, an increase of 11 compared to the previous year.

Jerlina Zheng, Senior Credit Analyst at Credit Insight Singapore, said, "The Chinese real estate downturn is already adversely affecting all developers, including large-scale developers linked to the government," adding, "It is unlikely that the actual situation will improve in the second half of this year."

China's real estate market shows no signs of improvement. According to the National Bureau of Statistics, real estate investment in China from January to July decreased by 8.5% compared to the same period last year. Both new construction starts and completed construction areas declined by 24.5% and 6.8%, respectively, compared to the same period last year, continuing the sluggish trend.

However, some assessments suggest that viewing this crisis as China's version of the 'subprime mortgage crisis' is an overstatement. The debts of Chinese real estate developers mainly consist of bank loans and bonds, making the affected parties clearly identifiable. Unlike the U.S. subprime mortgage crisis, which involved complex loss structures through derivatives investing in mortgages, the loss structure here is not complicated.

Some speculate that the recent situation could lead to the 'nationalization' of private real estate companies. Rather than spreading as a systemic risk, the government is expected to actively nationalize, adjust debts, and strengthen control.

This content was produced with the assistance of AI translation services.