It is a huge castle of debt that increasingly threatens to crumble, casting a heavy shadow on the Chinese economy and, by extension, the world economy.

Evergrande, the Chinese real estate giant, was rejected by the rating agency Fitch which downgraded its rating on Wednesday, September 8 to "CC", indicating that a default has become the most likely scenario.

The other two agencies, Moody's and S&P, agree and have already lowered Evergrande's rating several times since the start of the summer.

At issue: the $ 300 billion in debt that the group has accumulated over the years.

Real estate projects in 223 Chinese cities

An insane amount - equivalent to the public debt of a country like Portugal - which makes Evergrande the most indebted real estate developer in the world.

The officials of this Chinese giant officially admitted at the end of August that they might not be able to meet all their financial obligations.

This risk of default is all the more worried about Beijing as Evergrande is the symbol of the forced urbanization of Chinese society and, more broadly, "of the Chinese growth model which depends heavily on debt", underlines Jean-François Dufour, director of the consulting firm DCA Chine-Analyze, contacted by France 24.

The group was founded in 1996, at a time when China was tackling the Herculean task of moving hundreds of millions of Chinese from the countryside to the city, which brought "the real estate industry to a standstill. very strong growth, ”recalls Frédéric Rollin, investment strategy advisor at Pictet Asset Management, contacted by France 24.

Evergrande was the main beneficiary of this boom.

The private group has pursued a very aggressive strategy and very dependent on the goodwill of the banks to support it financially, consisting in stringing together real estate projects at a very sustained pace, while hiring people to serve its disproportionate ambitions.

Result: the group is currently in charge of 778 real estate projects in 223 Chinese cities and directly employs nearly 200,000 people.

Evergrande also maintains that its activity has created more than three million indirect jobs.

From pigs to football to electric cars

But not all of these jobs created are in real estate. Far from there. From the beginning of the 2010s - shortly after its IPO - Evergrande "embarked on a race against time to diversify its activities, much more than other groups in the sector", explains Jean-François Dufour.

Real estate was no longer so popular in China, was considered highly speculative and the government "had made other sectors a national priority", recalls the French economist. Evergrande has acquired stakes in video streaming services, health mutuals, milk manufacturers or pig breeding cooperatives. The group also bought a football club - Guangzhou FC in Canton - and built amusement parks. His latest fad was, from 2019, to want to manufacture electric cars without having any experience in this field.

"The aim of this strategy was to be present in enough priority sectors for the government to be more inclined to support the group financially when the debt wall would become difficult to sustain for Evergrande", explains Jean-François Dufour.

Unfortunately, the group was a bit too slow.

He is, for example, due to honor $ 15 billion in bills by the end of 2021, but only had $ 13 billion in the bank as of June.

And the banks are much less inclined to support Evergrande at all costs.

"The refinancing of corporate debt has become more complicated because of the restrictive monetary policy currently being pursued by the government," explains Frédéric Rollin.

Evergrande has "entered a vicious circle," said the Financial Times.

The banks no longer want to lend him the funds necessary to finish his real estate projects, which means that the developer has no more homes for sale and finds himself deprived of new money to reimburse creditors and reassure the banks.

"A bankruptcy would have consequences for the whole economy"

"In a normal market economy, Evergrande would have gone bankrupt for a long time," assures Jean-François Dufour.

But Chinese-style capitalism has long been much less concerned with private debt.

"The rule was that as long as a company gave the impression of moving forward and of having projects in progress, the banks gave it credit because in the context of strong Chinese growth, one had the impression that there would be always profits to the key, explains the director of DCA Chine-Analyze.

A logic which made "that in 2020 the debt of Chinese companies represented 160% of the national GDP, against only 85% in the United States and 115% in the euro zone", underlines Frédéric Rollin, of Pictet Asset Management.

Now that Beijing wants to clean up the finances of large groups and banks, giants like Evergrande find themselves in very delicate situations.

But a bankruptcy of this real estate giant "would have very profound consequences for the Chinese economy as a whole," said Jean-François Dufour.

He believes that "there would be at least one bank that would not survive it, which risks pushing others to be even more reluctant to lend to indebted companies, whistling the end of a part of the growth model to the Chinese".

In the current context of fragile economic recovery after the health crisis, this is a scenario Beijing does not want.

Especially since the collapse of Evergrande risks having repercussions beyond the Chinese borders.

The Chinese king of concrete "has several large international groups - such as Allianz or BlackRock - among its partners, and if Evergrande goes bankrupt, this could have consequences on their accounts and worry foreign investors who think that Beijing will support its champions no matter what. costs ", analyzes the Financial Times.

“Given the importance of this actor, the probability of a debt restructuring organized by the State is high,” Judge Frédéric Rollin.

In other words, Beijing will force the hand of creditors and organize the sale of the non-core assets of Evergrande.

"Most likely, this will involve placing the company under supervision, which will be managed by the State and a public bank while it finds a buyer. This is a model that has already been applied by the past in China, "recalls Jean-François Dufour.

But getting $ 300 billion in order is not going to happen overnight.

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