Why Evergrande’s Problems Are Only Getting Worse

For months, the unwinding of China Evergrande, the world’s most indebted property developer, played out like a slow-moving train crash.

After filing for bankruptcy protection last month — nearly two years after the company defaulted on payments to some creditors — Evergrande appeared on the path toward a more typical debt restructuring for creditors.

But it now has more than $300 billion in debt, and any semblance of normalcy is gone. In a filing with the Hong Kong Stock Exchange, Evergrande announced on Thursday that Hui Ka Yan, the company’s chairman and billionaire founder, was suspected by the authorities of criminal wrongdoing. The statement seemed to confirm news reports that Mr. Hui was under police surveillance, a form of house arrest, by the Chinese authorities.

Once heralded as China’s biggest property developer, Evergrande paid the price for years of reckless borrowing and overbuilding after the Chinese government cracked down on debt to limit the potential systemic risk from a property crisis.

Evergrande became a symbol of the excess fueled by China’s property bubble. It borrowed heavily and spent lavishly. The company bought a soccer club and owned theme parks, while Mr. Hui flew around in a fleet of private jets.

But as Evergrande scrambles to finish construction on hundreds of thousands of presold apartments and scrape together the funds to repay debts to suppliers, the company’s future is now wrapped up in China’s criminal justice system.

What is happening at Evergrande?

Evergrande is dealing with two major issues.

First, the company is in negotiations with overseas creditors on a restructuring plan to work out more than $30 billion in defaulted debt and other claims. But reaching an agreement has proved challenging, especially against the backdrop of slumping property sales that is pressuring Evergrande’s cash flow.

Last week, Evergrande canceled a series of meetings with creditors, noting that sales had “not been as expected” and that the company needed to reassess “the terms of the proposed restructuring.”

On Monday, Evergrande’s main China unit, Hengda Real Estate Group, said in a Shenzhen Stock Exchange filing that it had missed the principal and interest payment for a $550 million bond due that day. Evergrande had said over the weekend that it was unable to issue new debt because of an investigation into Hengda by China’s securities regulator.

But Evergrande’s efforts to get a handle on its debt are now being complicated by the second major problem the company is facing: Current and former officials are targets of criminal investigations.

This month, the police in southern China said public security officials had detained staff at Evergrande’s wealth management arm and imposed “criminal compulsory measures.” The Chinese news media also reported that the authorities had detained the company’s former chief executive, former chief financial officer and former chairman of its life insurance unit.

While Evergrande has not said much about the investigations involving these former executives, it confirmed the inquiry into Mr. Hui. It did not mention what crimes were being investigated.

The company also said its shares would not trade until further notice. Evergrande’s stock had fallen 60 percent in the previous two weeks.

How did Evergrande get into this mess?

Evergrande’s beginnings as a homebuilder were modest. Mr. Hui, a former steel factory worker, founded the company and oversaw its growth over a quarter century into a property giant. Its staggering rise was a byproduct of China’s urbanization push, which set off a construction boom fueled by huge amounts of debt to finance it all.

Like China’s other property developers, Evergrande had a business model that was great when the going was good. It borrowed to build, then repaid the debt when home buyers invariably snapped up property. As Evergrande grew, and its apartment buildings mushroomed across China, the amount of debt also ballooned. It branched out from real estate. It built electric vehicles, operated dairy, grain and oil businesses and even bought a soccer club.

But Chinese officials grew concerned that property developers were becoming so big and had borrowed so excessively that if they toppled, all that debt might drag down the country’s financial system. In 2020, regulators started making it more difficult for indebted property companies to continue borrowing. Evergrande’s business model — fueled by easy access to credit — crumbled.

A year later, Evergrande defaulted on its debt. But the company continued selling properties and developing electric vehicles. It reported combined losses of $81 billion in 2021 and 2022 before finally succumbing to bankruptcy in August. In a midyear report, the company said it lost an additional $5.3 billion in the first half of 2023.

Why do Evergrande’s problems matter?

Evergrande is certainly not an isolated case. More than 50 Chinese property developers have defaulted or failed to make debt payments in the last three years since the government’s crackdown on excessive borrowing by real estate firms.

And how Chinese officials handle the fallout from Evergrande may inform how Beijing will deal with other property developers in similar predicaments. Country Garden, once Evergrande’s main rival for industry supremacy, is also teetering.

Evergrande is significant, too, because of its size and the amount of debt it still carries. While some of that debt belongs to overseas investors, much of it is in the hands of small or midsize businesses — the backbone of the Chinese economy — still waiting to be paid.

This past week, the company said it still owed $82 billion to suppliers of construction materials alone. At a time when China is slumping, Evergrande’s unpaid bills are a weight rippling across the economy.