Evergrande, Already $310 Billion in Debt, Told to Blow Up Chinese Resort Due to Problems

A Chinese real estate developer is being ordered to demolish one of its largest complexes.

Evergrande Group was ordered to demolish a 39-building resort complex on Ocean Flower Island, an artificial archipelago off the coast of Danzhou. The developer did not release an explanation as to why the complex is being demolished, although Danzhou's government claimed that the complex violated urban planning law.

In 2021, Beijing began tightening restrictions on developers. The move was touted as one that would help rein in corporate debt and was implemented as part of the Chinese government's ongoing priority to reduce financial risk.

The Ocean Flower Island demolition is the newest headache that Evergrande has faced over the past few years. It has the dubious distinction of being the most indebted developer in the entire global real estate industry with around $310 billion in debt.

It is not immediately clear how much more debt the company will accumulate due to the demolition on Ocean Flower Island, nor has a timeline for the demolition been announced. Evergrande's buildings are the only ones being demolished on the island.

Evergrande Logo
Evergrande Group was ordered to demolish a 39-building resort complex on Ocean Flower Island, an artificial archipelago off the coast of Danzhou, China. Above, Evergrande headquarters in Shenzhen, southeastern China, on September 14, 2021. Photo by Noel Celis/AFP via Getty Images

Evergrande's struggle to comply with tighter official restrictions on use of borrowed money by China's real estate industry have prompted fears of a possible default and financial crisis. Chinese regulators have tried to reassure investors that any potential impact on financial markets can be contained.

Economists say Beijing can keep Chinese lending markets functioning normally in the event of an Evergrande default, which looks increasingly likely. However, they say Chinese leaders want to avoid sending the wrong signal by arranging a bailout at a time when they are trying to force companies to reduce surging debt levels.

Evergrande asked Monday for trading of its shares in Hong Kong to be suspended. Trading resumed following Tuesday's announcement, gaining 7.6 percent.

Evergrande warned last month it might run out of cash to keep up with debt payments and other obligations.

The company says it has 2.3 trillion yuan ($350 billion) in assets and 2 trillion yuan ($310 billion in debt), but it has struggled to sell assets fast enough to keep up payments to bondholders. Construction of some projects was temporarily suspended after contractors complained they weren't being paid.

Tuesday's announcement said buyers in 20210 signed contracts to purchase property worth a total of 442 billion yuan ($70 billion).

The government will organize demolition if the company fails to act.

The Hainan government ordered an investigation last year of Ocean Flower Island, a complex of hotels, an amusement park and other facilities, according to news reports. They said some building permissions were revoked and fines of 215 million yuan ($34 million) were imposed for planning and construction violations.

The Associated Press contributed to this report.

Evergrande Worker
Evergrande Group's $310 billion debt will grow due to the company being ordered to demolish a 39-building complex. Above, a worker pushes a cart in front of a sign showing Evergrande's China operation at a housing complex owned by the property developer in Beijing on December 8, 2021. Photo by Noel Celis/AFP via Getty Images