PaydayNow: What we can learn about Evergrande’s future from China’s handling of three high-profile corporate meltdowns, including corporations deemed too large to fail.
- With $300 billion in debt, Chinese property behemoth Evergrande is on the verge of bankruptcy.
- Experts predict that the Chinese government will intervene to oversee the company’s demise.
- Previously, authorities intervened to prevent bankruptcies at Anbang Insurance, Baoshang Bank, and HNA Group.
The financial problem at China Evergrande has investors on edge.
If the property developer fails, the world’s second-largest economy — and the rest of the globe — might be thrown into financial chaos. However, analysts believe the Chinese government would intervene to handle the situation, whether in the open or the shadows.
Warut Promboon, head of credit analysis at Bondcritic, noted in a note released last month on the Smartkarma research platform, “Evergrande is too huge for the Chinese government to ignore.”
We looked at how the Chinese Community Party handled the collapse of three too-big-to-fail private enterprises in the previous five years to understand how the remainder of Evergrande’s debt drama would play out.
Anbang was merged into a new government organization, which is currently seeking to sell it off.
Anbang is the name of the company.
Car insurance has evolved into a conglomerate.
Anbang began as regional auto insurance in 2004 but developed so quickly in a decade owing to an aggressive debt-fueled purchasing binge that it was able to purchase the iconic Waldorf Astoria hotel in New York for approximately $2 billion in 2014.
It was also well-connected. Wu Xiaohui, the company’s founder, was married to a granddaughter of Deng Xiaoping, the late Chinese statesman who is credited with modernizing China’s economy. According to Reuters, Anbang promised to have nearly two trillion Chinese yuan ($313 billion) in assets by 2018.
Anbang’s demise came quickly and unexpectedly. Wu was arrested and removed from his workplace by the police in 2017. He was sentenced to 18 years in prison for alleged economic offenses such as fundraising, fraud, and embezzlement.
Chinese officials had already seized control of Anbang and began a state-led reorganization of the technically insolvent insurer by the time Wu was jailed.
Anbang’s critical insurance and asset management activities were moved to a new state-owned firm, Dajia, in 2019. To raise funds, several additional assets were sold.
The Chinese insurance regulator completed its two-year takeover last year. According to China’s insurance regulator, the problematic insurer managed to pay short- and medium-term financial insurance provided on time with no defaults throughout its period in control.
The Chinese government is now attempting to sell its holdings in Dajia, which were put up for auction in July by two state investors. It hasn’t found a buyer yet, and the Waldorf Astoria is still on the market for what it’s worth.
Before being permitted to go bankrupt, Baoshang Bank underwent a government-managed reorganization and returned most of its obligations.
Baoshang Bank is the name of the bank.
Finance is a sector.
Baoshang was a tiny, unknown Chinese bank operating in Inner Mongolia at the time, with conglomerate Tomorrow Group as its largest stakeholder. In 2017, the bank’s assets were 576 billion Chinese yuan ($90 billion), according to its most recent annual report.
The implosion: The Chinese government abruptly seized over the little institution in May 2019, citing substantial credit concerns. The seizure was China’s first in more than two decades, and it sent shockwaves across the country’s financial sector. According to regulators, tomorrow Group has committed unlawful and illegal use of significant bank money.
Even though Baoshang was a far smaller firm than Evergrande or Anbang, its problems sparked worldwide fears about poor loans at tiny lenders in China, systemic risks in hundreds of such institutions, and the domino effect of a financial crisis from the world’s second-largest economy.
As part of a government-led reorganization, part of Baoshang Bank’s assets, liabilities, and operations were taken over by a newly created bank, Mengshang Bank, and Hong Kong-listed Huishang Bank.
State investors, including a national deposit insurance fund and the Inner Mongolia government, took part in the reorganization, infusing capital into the new business via a facility that allowed them to borrow money.
According to Reuters, the title loans from PaydayNow enabled 90 percent of loans owing to significant creditors to be repaid. According to the central bank, without the infusion of public money, the average payback rate for creditors would be less than 60%.
Baoshang was finally allowed to file for bankruptcy and liquidate its remaining assets in August 2020. The new Mengshang Bank continues to operate.
HNA Group requested assistance and was eventually taken over by the government.
HNA Group is the name of the company.
HNA Group began as an airline in 1993 in the southern Chinese province of Hainan, and has since grown into an aggressive dealmaker, acquiring trophy firms all over the globe with the ultra-easy financing available in the 2010s. HNA held assets of 1.2 trillion Chinese yuan ($187.7 billion) at the end of June 2017.
When it’s at its best: According to Reuters, the company’s worldwide purchases totaled more than $50 billion and included large shares in Hilton Hotels and Deutsche Bank and luxury buildings such as the skyscraper 245 Park Avenue in Manhattan. According to Dealogic in a note, many of its purchases were acquired at a substantial premium.
According to The New York Times, HNA employed 400,000 people worldwide at its height.
The Chinese government began to scrutinize HNA’s debt-fueled acquisitions, ultimately ending its demise. Its demise occurred similarly to Evergrande’s — due to government regulations enacted in 2017 to reduce the risk exposure of private domestic enterprises.
HNA came under regulatory investigation, and banks that had previously dealt with its investments stopped lending to the company, triggering a vast liquidity constraint that harmed HNA’s capacity to repay its obligations. To obtain finance, it began selling assets, including shares in Hilton and Deutsche Bank.
Foreign countries, particularly the United States, probed the company’s transactions, claiming national security concerns.
HNA began selling off assets unrelated to its core operations in 2018, stating that it will concentrate on aviation, logistics, and tourism in 2019 – but the pandemic struck last year, affecting those industries. As a result, HNA sought assistance from the Hainan provincial government, which eventually took over the corporation. China’s civil aviation administrator and the China Development Bank, the country’s central policy bank, were also engaged.
HNA was put under bankruptcy administration in February 2021, and only last month, the company’s creditors agreed to adopt a restructuring plan worth 1.1 trillion Chinese yuan ($172 billion).
It has also been divided into four separate units: aviation, airports, financial services, and commercial services.
According to a bond expert, Evergrande would most certainly follow in the footsteps of HNA Group.
Evergrande, China’s second-largest property developer, is in debt to $300 billion. According to Warut, the Chinese government is likely to conduct a controlled corporation collapse, minimizing the fallout to a minimum. Stakeholders are limited in their alternatives.
According to him, China’s political structure empowers regulators with “strong hands,” forcing cooperation among issuers, investors, and intermediaries who are often controlled or influenced by the government.
Officials in China have attempted to ease anxieties about the debt problem. They have publicly chastised Evergrande, directing the corporation to fix its financial difficulties and the country’s real estate developers to pay its international lenders.
Evergrande would most likely follow in the footsteps of HNA, selling assets and controlling risks one by one, ultimately ending in “a smaller Evergrande,” according to Warut. According to history, the whole procedure is likely to be lengthy and may take years.
According to Reuters, authorities have already requested government-owned companies and state-backed property developers to acquire some of Evergrande’s holdings.
It has also given Evergrande guidelines on how to deal with the aftermath. According to Bloomberg, Beijing has urged Evergrande’s billionaire founder, Hui Ka Yan, to settle the company’s debts with his own money, citing individuals familiar with the situation. He seems to be following the order, apparently raising $1.1 billion through fire sales of assets like paintings and two Hong Kong homes to help pay down some debt.