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Rows of residential towers, some 26 stories high, stand unfinished in this provincial city about 350 miles west of Shanghai, their plastic tarps flapping in the wind.
Elsewhere in Lu’an, golden Pegasus statues guard an uncompleted $9 billion theme park that was supposed to be bigger than Disneyland. A planned $4 billion electric-vehicle plant, central to local leaders’ economic dreams, remains a steel frame with overgrown vegetation spilling into the road.
The structures are monuments to the once-grand ambitions of China Evergrande Group, now among the world’s most indebted property companies, and a case study in how China’s dependence on real estate as an economic engine helped feed those ambitions.
Evergrande is in trouble in part because it developed properties aggressively in places such as Lu’an, where its debt-fueled building spree came as the city’s population dwindled. It launched hundreds of projects across more than 200 Chinese cities.
As it expanded, Evergrande racked up more than $300 billion in liabilities. In September, it said it was facing unprecedented difficulties and was trying to protect customers. Days later, it missed a scheduled interest payment to overseas bondholders. On Monday, Evergrande and its property-management unit halted trading in Hong Kong; the unit said it could be subject of a takeover bid, which could bring in much-needed cash for Evergrande.
The company’s troubles are among the impacts unfolding since Beijing, concerned about risks to the financial system, last year began forcing developers to start cleaning up their balance sheets. Global investors are worried the crackdown could trigger financial-market distress or a protracted real-estate downturn. People who bought units in unfinished towers are wondering where their money went.
"We spent all our family’s savings on this apartment," said a 59-year-old farmer surnamed Jiang, who, like other buyers in Lu’an, didn’t want to provide her first name because she is worried about upsetting the company.
In August, she said, she bought a unit for 890,000 yuan ($138,000) in an Evergrande project called Junting, or "Jade Palace," with 47 apartment buildings. Work halted months ago, locals said. Ms. Jiang said she didn’t know when—or if—it would restart. "We really don’t know what to do," she said.
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Evergrande has completed many projects in Lu’an over the past decade and turned homes over to buyers. An Evergrande spokesman said the company would do everything possible to ensure completion of its projects "wherever the city or region is." Lu’an officials didn’t respond to requests for comment.
Central to Evergrande’s expansion was a real-estate economy across China in which people from developers to financiers to city leaders had an incentive to perpetuate the boom. Evergrande found a market for its projects among a range of buyers—including corporate employees and farmers seeking to move to more urban areas—who believed values would rise no matter what and assumed Beijing would protect them against decline.
For local leaders, developers represented a revenue stream. With limited power to tax, Chinese cities get roughly a third of their revenue from selling land to property developers like Evergrande. Cities annex farmland to sell to developers; farmers often get to buy apartments at a discount.
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Real estate became some cities’ biggest economic driver and the most important source of revenues. Lu’an’s take from land sales totaled $1.2 billion in the first half of this year, compared with total tax revenue of $900 million.
But property construction in smaller cities ran well ahead of demand from prospective occupants for the last five years in China, leaving the market increasingly dependent on speculators and investors to buy properties, said Logan Wright, China markets research director at Rhodium Group, a research firm based in New York. About 21% of homes in urban China were already vacant in 2017, which equated to 65 million empty units, according to data from China Household Finance Survey.
As China cracks down, new-home construction has slowed and housing prices are falling in many places. Local governments’ land-sales revenues fell by 17.5% in August from a year ago, according to Rhodium Group.
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A sharp deceleration in China’s property market could "exacerbate and amplify downward pressure" on the job market and China’s overall economy, Goldman Sachs economists warned in a recent note. By some estimates, real-estate-related activity now accounts for nearly one-third of China’s economy.
Most economists and investors believe China’s government will restructure Evergrande. Late last month, the People’s Bank of China said it would "maintain the healthy development of the property market and safeguard the legitimate rights and interests of house buyers."
Still, economists say there will be lost economic activity if Beijing continues to drain away excess debt and root out speculation in real estate.
Some Evergrande projects appear to have fared better in bigger cities. Some Chinese media have reported that while it halted construction on some developments in Guangzhou in southern China, construction on some projects resumed in late September.
Lu’an has lost 5% of its population in the past 10 years. Among Lu’an’s four million people, many are over 60 and residents’ average annual disposable income of $3,500 is below the national average of around $5,000, government data show.
Yet from around 2011 through 2020, Evergrande invested more than $10 billion and launched multiple major projects in Lu’an, including residential complexes, the EV plant and the "Fairyland" theme park featuring pastel-colored European-style pedestrian blocks and a mélange of animal characters, including a reindeer-like creature and a blue dragon.
Four unfinished Evergrande projects in Lu’an that The Wall Street Journal visited in late September appeared to have stopped construction. Nearby store owners described the loss of business after construction workers stopped showing up. In one Evergrande office, staff took naps or huddled over smartphones.
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At least 23 lawsuits involving commercial bills—a form of IOU among Chinese businesses—have been filed this year against Evergrande’s subsidiaries in Anhui province, where Lu’an is located, according to a Journal search on Tianyancha, a corporate database in China. Plaintiffs included makers of paint, cable, concrete and elevators as well as construction companies. The Journal couldn’t find any such lawsuits in the previous year in the database.
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Evergrande was founded in 1996 in Guangzhou by Xu Jiayin, who local media says grew up in a poor village as a woodcutter’s son. He became known as Hui Ka Yan, his name in Cantonese.
Mr. Hui expanded Evergrande into a nationwide powerhouse with more than 150,000 workers, reporting record sales year after year as home prices soared. Evergrande’s share price grew more than fivefold in 2017, a year Mr. Hui temporarily became China’s richest man, according to research firm Hurun Report.
The company raised money in part by preselling units to home buyers for cash upfront who then waited for the buildings to rise. Its creditors include buyers of 1.4 million apartments that Evergrande presold and promised to build but hasn’t yet completed, estimates research firm Capital Economics. Evergrande also borrowed from banks and foreign investors.
It expanded beyond real estate, getting into mineral-water production and buying a professional soccer club. It joined the electric-vehicle industry with a Hong Kong-listed EV unit, China Evergrande New Energy Vehicle Group Ltd. , whose market capitalization once hit $87 billion, more than most global auto makers at the time.
In 2017, it entered the theme-park business, launching 15 projects nationwide involving more than $100 billion in total investment, according to Journal calculations based on local-government numbers. Around that time, Dalian Wanda Group, a conglomerate that had vowed to out-compete Disney parks in China, said it was retreating from the business after running up too much debt.
Principal cities like Beijing and Shanghai kept a tight grip on land supply for new construction, so Evergrande—like many other developers—turned to smaller and more out-of-the-way cities like Lu’an with plenty of land to sell.
When Evergrande began buying land around Lu’an around 2011, it was a sleepy place known mainly for Lu’an Melon Seed Tea. Evergrande launched at least a half-dozen major residential projects in the area while other major developers also rushed in.
Buyers often queued up for hours or went through lotteries to angle for apartments. A senior Anhui province official in 2012 publicly praised Evergrande, local media reported, saying its "strengths in scale and brand name make it a dragon-head-like enterprise in China with international influence."
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Between 2019 and the end of September 2021, Evergrande was Lu’an’s biggest developer based on the number of apartments sold before their construction work was completed, with 8,123 new apartments presold, according to Journal calculations using information from Lu’an’s housing authority.
Evergrande added commercial buildings and a movie theater. In 2019, it bought 14 more lots in Lu’an, driving the city’s land sales to over $2.6 billion that year, according to Anhui Land Information Network, a research firm tracking government land auctions. The sales helped prompt the local government to increase its fiscal-revenue budget for the year three times.
Evergrande around that time chose Lu’an for one of its EV subsidiary’s plants. Evergrande said it would produce as many as 500,000 cars, generate $15.5 billion in industrial output each year and contribute $1.2 billion in annual tax revenue for the local government, according to local media.
As residential projects rose and residents moved into completed projects, Lu’an transformed into urban sprawl stretching across about 6,000 square miles, with housing-block rows surrounded by farmland. New York City is about 300 square miles.
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Evergrande faced cash crunches over the years but always overcame them. Then Beijing announced plans in August 2020 to crack down on developers’ excessive borrowing via the "three red lines," limits that kept the company from taking on new debt.
Evergrande’s real estate, theme park and EV subsidiaries each recorded losses during the first half of 2021. Cash became so short the company this summer started paying some suppliers with unfinished apartments, the Journal has reported. In Lu’an, complaints flooded into the local government website, with some buyers of unfinished homes fearing they would lose their life’s savings or be homeless in retirement.
Among the projects whose construction appeared halted last month was a large unfinished portion of Evergrande’s Yujingwan, or "Imperial Scenery Bay," a complex spanning several blocks. Across the street, a woman giving her name as Ms. Wang, 41, was selling beverages and foodstuffs one recent day at a convenience store she opened in 2017.
Ms. Wang said she bought an apartment last year for more than 400,000 yuan in the complex’s so-called Sixth Phase after Evergrande offered a roughly 35% discount. She borrowed from friends and relatives to buy the new home, which she said is supposed to be ready in 2023.
She said she believes the government, or perhaps a state-owned enterprise, will step in to finish the project. Other buyers echoed that belief.
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It isn’t clear where the money that developers like Evergrande collected from home buyers through presales has been going. In many cases, the Journal has reported, developers use that cash as general funding for operations.
The Evergrande theme park was partially operating on the late-September visit, with some small-scale attractions and a handful of restaurants open. Incomplete apartments towered over the park. The carousel was closed.
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