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1 [1] (August 8, 2024)

handle is hein.crs/goveqhp0001 and id is 1 raw text is: Evergrande Group and China's Debt Challenges Since 2021, some Members of Congress have raised concerns about the People's Republic of China (PRC or China)'s debt levels and the solvency of PRC property developers. The inability of Evergrande Group, China's second largest property developer, to repay its domestic and foreign debt highlights issues related to the structure and operations of PRC firms in China and offshore, and the role of the state in PRC firms, generally and in times of crisis. While U.S. firms' direct exposure to Evergrande is about $348.4 million, according to Bloomberg, the case raises broader issues for Congress, including (1) foreign creditor rights in PRC corporate restructurings; (2) potential opacity and risks in how PRC firms are structured, operate, and report; and (3) potential risks in China's economy. Congress directed U.S. audit oversight of and reporting requirements for PRC firms in P.L. 116-222, and is considering other U.S. investor protections, reporting requirements for PRC firms, and restrictions on certain U.S.-China trade and investment activity. For related issues before Congress, see CRS In Focus IF1 1667, China's Economy: Current Trends and Issues, CRS In Focus IF1 1803, U.S. Capital Markets and China: Issues for Congress, CRS In Focus IF12212, U.S.-China Auditing Agreement and Issues for Congress, and CRS In Focus IF1 1284, U.S.-China Trade Relations. vergrande roup Evergrande is a state-tied property conglomerate based in Shenzhen that also operates energy, entertainment, health, insurance, and technology businesses. It was founded in 1996 when the government was liberalizing property sector investment. Tax reforms in 1994 had shifted a large amount of local revenue flows to the central government, prompting local governments to turn to sales of land-use rights and bond issuances for revenue. This shift raised the importance of property transactions and values to local governments. The Shenzhen government is a major shareholder in Evergrande. In 2017, Evergrande moved its real estate assets into Hengda Real Estate Group Co., Ltd., with plans (later deferred) to list Hengda on the Shenzhen Stock Exchange through a reverse takeover of Shenzhen Real Estate, a government firm. Hengda sold 25% of its shares to the Shenzhen government and state investors. Evergrande is also tied to the PRC central government. The Ministry of Finance's CITIC Group is a shareholder. In 2018, Evergrande signed a $16 billion agreement with the China Academy of Science to invest in foreign technologies on its behalf; it acquired electric vehicle firms in the United States, the United Kingdom, and Sweden, and invested in biotechnology research at Harvard University. Evergrande's overseas presence allows it to raise and transfer funds in and out of China. Evergrande and three of its subsidiaries-China New Energy Vehicle, HengTen Networks, and Evergrande Property-are listed in Hong Kong. It trades corporate bonds in Singapore and operates a Updated August 8, 2024 wealth management business through a life insurance firm. 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. Of its more than 500 subsidiaries, Evergrande named 170 principal subsidiaries in its 2022 annual report. Evergrande's Debt and Restructuring In 2021, Evergrande was unable to repay $305 billion (2% of China's GDP) it owed to PRC and foreign creditors. That figure did not include off-book liabilities. In January 2024, a Hong Kong court ordered Evergrande to liquidate assets tied to its Hong Kong unit after a failed restructuring deal among PRC banks and foreign creditors. Hong Kong's court ruling does not govern the firm's PRC subsidiaries, which constitute 90% of its business. Since 2021, the firm's PRC assets have been mostly redistributed to domestic creditors, particularly local governments. In 2021, Hong Kong and PRC authorities agreed to mutually recognize liquidation orders in a trial that is not in Shenzhen where Evergrande is based. In May 2024, PRC securities regulators fined the firm about $580 million and banned its founder from financial markets for fraudulent accounting and reporting. In August 2024, liquidators sought to recover $6 billion from the firm's executives and initiated legal action against Evergrande's auditors. According to Bloomberg, as of 2024 the firm owed $300 billion in debt (including $20 billion in offshore debt) and held about $240 billion in assets. U.S. firms hold about $348.4 million (1.5%) of the firn's $23.2 billion in foreign corporate debt. PRC Debt and Deeveraging Efforts PRC total debt-household, corporate, and government- reached 297% of GDP in 2022 (Figure 1), with the majority of debt held by companies. (PRC firms owe an estimated $945.5 billion in bond payments in 2024). Local governments had $7.6 trillion in interest-bearing debt raised through finance vehicles as of 2022, according to a Peking University study. In January 2024, the PRC government restricted the issuance of 364-day offshore bonds to close a gap that local governments had been using to raise funds. Figure I. China's Debt as Share of China's GDP % of GDP - TotalI 25 2031; 20j SJ 7. Source: CRS with data from the Bank for International Settlements. . Huse!-ci CrIp-rae Gaernmentl

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