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1 [1] (October 21, 2021)

handle is hein.crs/goveerm0001 and id is 1 raw text is: s n flSerwce [at m~ ~ h I ~ ~iPt hA xflA 14 9 October 21, 2021 Evergrande Group and China's Debt Challenges Concerns aboutChina's high debtlevels intensified in September 2021, when its second-largest property developer, Evergrande Group, failed to repay its debt obligations. The government ofthe People's Republic of China (PRC or China) seeks to reduce debt and curtail market risks among firms like Evergrande, but defaults and a decline in property values could have broader effects. China's property market accounts for almost 30% of GDP, a higher percentage than in most countries, and thus has complicated China's efforts to reduce debt. Property is a main source of local government revenue and akey factor in corporate valuations and household net worth. This constrains policy options, despite China's leader Xi Jinping's statements that supportreducing debt and inequality. Declining landrevenue could affectlocal governments' ability to repay loans and specialbonds, which Nomura Holdings estimates reached almost $7 trillion (44% of China's GDP) in 2020. China relies on debt-financed fixed asset investment (including property) and exports for growth. Supply disruptions, energy and commodity shortages, and industrial and property overcapacity are most likely exacerbating economic risks. The situation highlights potentialbroader and longer-term risks in China's economy that Congress may consider as U.S. fmancialfirms seekto expand theirexposureto China. Evergrande Group Evergrande Group is a state-tied property conglomerate based in Shenzhen that also operates energy, entertainment, health, insurance, andtechnology businesses. Thefirmwas founded in 1996 when the government was liberalizing investment in the property sector. Taxreforms in 1994 had shifted a significant amountoflocal revenue flows to the central government, prompting local governments to turn to property sales and bond is suances for new revenue streams. This shift increased the importance ofland s ales, reales tate trans actions, and property values to local governments. The Shenzhengovernmentis a large shareholder in Evergrande. In 2017, Evergrande moved its realestate assets into theHengdaRealEstate firm, with plans (later deferred) to list Hengdaon the Shenzhen Stock Exchange through a reverse takeover of Shenzhen Real Es tate, a Shenzhen government firm. Hengda sold 25 percent of its shares to the Shenzhen government and other state investors. Evergrande is also tied to the central government. The Ministry ofFinance's CITIC Group is a shareholder. Moreover, in 2018, Evergrande signed a $16 billion agreement with the central government's China Academy of Science to investin priority emerging technologies on its behalf. Evergrandehas acquiredfirms that produce electric vehicles in the United States, the UK, and Sweden, andhas invested in biotechnology research at Harvard University. Evergrande's overseas presence allows it to raise and transfer funds in and out of China. Evergrande Group and three subsidiaries-China New Energy Vehicle, HengTen Networks, and Evergrande Property-are listedin Hong Kong. Its corporate bonds trade in Singapore, and it operates a wealth management business through its life insurance subsidiary. Evergrande's CEO controls two firms registered in the British Virgin Islands (BVI)-Xin Xin (BVI) Ltd. and CEG Holdings (BVI) Ltd.-to facilitate offshore investments. Xin Xin has over 960 subsidiaries. Evergrande and China's Debt Evergrande owes about $305 billion in debt (2% of China's GDP). The firm is obligated to repay $124 billion this year-including $19.3 billion in bonds-but may only have 10% of this amountin cash onhand. The firmis said to owe money to 171 domestic banks and 121 fmancialfirms. Off- bookliabilities have not been disclosed. As China's largest issuer ofhigh-yield dollar denominated debt, Evergrande was an attractive investment, despite known risks, because it paid annualinterest rates of 7.5% to 14 %. China's total debt-household, corporate, and government-reached 290% of GDP in 2020 (Figure 1), with the majority of debt held by companies. China has an estimated $100 billion in U.S. dollar-denominated debt duein 2021. Within China, PRC firms owe an estimated $706 billion in 2021. Figure I. China's Debt as Share of China's GDP % of GDP 300£ Total 250%/ 200% 150%I Ub 2006 2008 2010 2012 2014 201 2018 2020 U Households : Corporate Governmentt Source: CRS with datafromthe Ban kfor International Settlements. Notes: *Government debt in nominal value. Does not include financial sector debt. Comparable U.S. debt as a share of U.S. GDP was 295.5% in 2020. Deleveraging Efforts In 2016, the Chinese governmentinitiated a campaign to reign in debt accruedby banks, localgovernments, and unauthorized lending. The effort included scrutiny of overseas real estate, entertainment, and sports investments. In July 2017, People's Daily, the Communist Party of ttps://crs reports.cong re 100% 50%

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