September 20, 2021
Updated January 29, 2024
Image credit: Getty Images
Image caption: Before the debt crisis, Evergrande was building a new stadium for football team Guangzhou FC.
The company's chairman had been under police surveillance in September last year after reports that other current and former executives of Chinese property giant Evergrande had also been detained.
What does Evergrande do?
Businessman Xu Jiayian founded Evergrande Group, formerly known as Evergrande Group, in 1996 in the southern Chinese city of Guangzhou.
The broader Evergrande Group is not limited to property development.
The company's businesses range from asset management to electric vehicle manufacturing to food and beverage production, and it even owns a controlling stake in Guangzhou FC, once one of China's biggest soccer teams.
Mr Xu was once Asia's richest man, with a fortune estimated by Forbes magazine at $42.5 billion (£34.8 billion), but his assets have since plummeted as Evergrande's problems grew.
Why is Evergrande in trouble?
Evergrande has aggressively expanded its business by borrowing more than $300 billion, becoming one of China's largest companies.
Beijing introduced new rules in 2020 to control the amount of debt held by major property developers.
The new measures have seen Evergrande offer properties at steep discounts to ensure it has the funds to continue operating.
Currently, the company is struggling to make interest payments on its debt.
This uncertainty has caused Evergrande's shares to fall 99% over the past three years.
Why would it matter if Evergrande went bankrupt?
There are several reasons why Evergrande's problems are serious.
First, many people bought properties from Evergrande before construction even began, making down payments and standing to lose that money if the company goes bankrupt.
Some companies that do business with Evergrande, such as construction and design firms and material suppliers, are at risk of suffering huge losses and even going bankrupt.
The third is the potential impact on China's financial system: If Evergrande were to collapse, it could force banks and other lenders to cut back on loans.
This could lead to a so-called credit crunch, with businesses struggling to borrow money at affordable interest rates.
A credit crunch would be very bad news for the world's second-largest economy, as companies unable to borrow will find it harder to grow and, in some cases, unable to stay in business.
This could make China appear a less attractive investment destination and make foreign investors uneasy.
Is Evergrande “too big to fail”?
The potentially severe consequences of a highly indebted company's failure have led some analysts to suggest Beijing may step in to rescue the company.
However, Jackson Zhang of financial market research platform Bondsupermart doesn't see that happening for now.
“To be honest, Evergrande is already bankrupt,” Chang said, adding that he believes it is “on the brink of forced liquidation.”
This could have a major impact on the Chinese economy, as the real estate sector accounts for about a quarter of China's economic growth.
Zhang also suggests China could follow a similar path to Japan in the 1980s, when it fell into decades of economic stagnation.
But others believe a complete collapse of Evergrande is unlikely.
“That could create a vicious cycle that could spill over to other indebted companies and further damage the whole real estate sector, which is so important to economic growth,” Dexter Roberts, director of China issues at the Mansfield Center at the University of Montana, told the BBC.
“At the same time, many people who have invested a large part of their household wealth in apartments will also be hit hard,” he added.
“The old Evergrande will no longer exist,” said Roberts, who spent more than 20 years in China as a journalist, and while authorities might keep the company open, “it will be a much-scaled downsized company.”
Reporting by Peter Hoskins and Mariko Oi