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China real estate giant reveals staggering $81 billion loss amid slump

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Chinese real estate developer Evergrande has disclosed huge losses of $81 billion over 2021 and 2022, underscoring how its massive debts remain a serious concern for the financial health of the Chinese property sector — and the world’s second largest economy overall.

China’s tentative post-pandemic recovery is threatened by the sluggish real estate sector, which is still responsible for a quarter of the economy’s growth.

As one of China’s largest builders of apartments, Evergrande’s rapid slide into financial distress in late 2021 caused alarm around the world as some analysts feared a collapse that could be China’s “Lehman moment” — and the start of another global financial crisis.

China Evergrande’s $300 billion cash crunch is deepened by demolition order

Instead off letting the company implode under a $300 billion pile of debt, Chinese authorities opted for what analysts called a “controlled demolition” — essentially managing the corporation through a gradual collapse. Since then the company has continued to limp on, posing a continual headache for the policymakers who are trying to restore confidence in the real estate sector.

The group finally came clean about the extent of its near-fatal cash crunch and the slow progress it has made toward resolving its financial difficulties when it released a repeatedly delayed earnings report released late on Monday local time.

Aside from the $81 billion in losses, Evergrande’s total liabilities also continued to grow in 2022 to reach $335 billion compared to just $251 billion in assets, according to the earnings statement.

That disclosure underscored the Chinese government’s tricky effort to tackle real estate debt without bursting a possible property bubble, as it tries to ensure a tepid post-pandemic recovery doesn’t get knocked off track by a worsening real estate slump.

The Chinese economy missed expectations to grow by 6.3 percent year-on-year in the second quarter, according to data released on Monday. That slower than expected recovery is in part caused by falling property investment, which was down 20.6 percent in June, according to Reuters.

Lingering uncertainty over Evergrande’s fate reflects the overall poor state of the sector — and threatens to worsen it, analysts warn.

“Evergrande’s insolvency, beyond its own liquidity coming to a standstill, is also related to the cooling of housing sales” and the increased pressure for indebted property developers to finish projects, Xie Yifeng, President of China Urban Real Estate Research Institute, told state-run Beijing Business Today. “It’s a vicious cycle.”

The continued insolvency means that “simple debt restructuring may be unable to save Evergrande,” Chen Xin, a finance professor at Shanghai Jiao Tong University, wrote on Weibo, China’s answer to Twitter. The situation is “tantamount to disaster” for the company’s creditors, Chen added.

Surging demand for homes and government reliance on land sales for income meant that developers like Evergrande had easy access to bank loans and could aggressively expand using a borrow-to-build model throughout the 1990s and 2000s.

But the government soon became wary of ballooning debt that might cause defaults and in 2020 regulators severely limited borrowing. Severely in-the-red Evergrande was left on the verge of collapse, in a crisis that many saw as marking the end point for China’s housing boom.

Reduced access to loans has left property developers struggling to finish apartments, hurting buyer confidence and dragging down sales. Floor area bought in June fell by 28 percent compared to the same period a year before, official data released on Monday showed.

That slump extends a dilemma for Chinese policymakers who are torn between stimulus measures to revive confidence and determination to defuse financial risks that could ultimately do more damage to the economy.

So far, however, Evergrande has neither collapsed nor significantly improved its financial situation.

Most of the $81 billion net losses disclosed on Monday was accumulated in 2021, resulting in a crisis and promises to restructure at the end of that year. But even last year it still reported nearly $15 billion in net losses, underscoring how the company has struggled to substantially resolve its insolvency problems.

In another sign of the group’s uncertain financial future, Evergrande’s external auditor Prism said that it could not comment on the financial statements because it was unable to obtain sufficient audit evidence regarding the group’s ability to meet its financial obligations.

Hong Kong-traded shares in Evergrande have been suspended since March 2022, meaning that the company is just two months away from being delisted from the stock exchange.

The company also said on Monday that it will meet its overseas creditors later this month to try to reach a deal on debt restructuring.

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