A restructuring at the world’s most indebted real estate developer is looming. The Chinese government has already hired financial advisors to assess China Evergrande Group. With more than $300 billion in liabilities on its books and not even $15 billion in cash, Evergrande is racing against time. It will not be able to make loan interest payments due Monday, Bloomberg News reported.

Fiscally constrained itself, Beijing is not keen to bail out companies. Plus, in the last few years, regulators have already gained some expertise in winding down unwieldy debt-fueled conglomerates. The restructurings of Anbang Group Holdings Co. and HNA Group Co., while painfully slow, were largely orderly and did not prompt a Lehman-like moment. So can China do it again with Evergrande? First, it has an impossible equation to solve.

Billionaire founder Hui Ka Yan’s biggest problem is that Evergrande’s working capital is tied to its inventory, composed largely of unfinished projects. As of June, that inventory accounted for about 60% of its total assets. Properties under development, in particular, ballooned to 1.3 trillion yuan ($202 billion), a 54% jump from three years ago. This explains why, whenever faced with street protests from angry creditors, all Evergrande could offer was unsold apartments, store fronts and parking lots. It has no cash. 

If only Evergrande could offload some of these projects to, say, a cash-rich state-owned enterprise, its immediate liquidity crunch would be resolved. Beijing would then have some breathing room to gradually scale down this beast. 

But there are few willing takers. Evergrande’s latest settlement offer to investors in its wealth management projects showed us why: Its inventory quality is really poor. To redeem its investors, apartments were offered at 28% discount to their market value, and parking lots were given away at a 52% discount, according to Caixin, the influential local financial media outlet. 

That’s because most of Evergrande’s projects are not prime real estate. As of 2020, 57% and 31% of its land acquisitions were in Tier-3 and weak Tier-2 cities, according to Bloomberg Intelligence. With China’s new home price gains rapidly evaporating and home sales slumping, Evergrande will have an even tougher time moving its inventory. As of June, it was already taking the developer over 3.5 years to sell unfinished projects. Its future will be dimmer.  

Against this shaky warehouse are a lot of bills to pay. While much focus has been placed on Evergrande’s bank loans and bond issues, the developer also owes billions of dollars to its suppliers, as well as apartment buyers. (It has benefited from a practice common in China called pre-sales: Consumers pay the full price of homes before they are built, handing over a lump sum and their mortgage borrowings.) 

On top of this, Evergrande has sold wealth management products to its employees, suppliers and apartment buyers over the years. We don’t know how much is at stake — it was essentially off-balance-sheet shadow banking, which means its actual debt could be much greater. About 70,000 retail investors were tied up in these products, according to a REDD report. 

Consider what would happen if Evergrande were to take its inventory to the open marketplace. A 40% haircut is a fairly conservative estimate. So if China auctioned off its unfinished projects, Evergrande’s entire equity would be wiped out. Beijing might just have to come up with a partial bailout to repay its small business and retail creditors. Defaulting on the middle class is not a palatable solution for a government intent on pushing its common prosperity doctrine. 

So perhaps we could go into a barter economy instead? Like Oprah Winfrey, who once famously gave away a brand-new car to everyone in her studio audience, China can offer Evergrande’s creditors some piece of its unfinished, skeleton building units. Everyone gets an empty parking lot, in the middle of nowhere. Hui could be as generous as Oprah. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.

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