What were the criticisms leveled against the company?

I need a response to my classmate below:

Dear Dr. P & Classmates,
I hope you are all doing well.
Locate and post a recent news story from The Wall Street Journal or other reputable source about a publicly-traded company that has been criticized for its cash management practices and/or the amount of debt it is carrying.
For this week’s discussion post, I have chosen China Evergrande Group, a Chinese property developer, which has accumulated more $305 billion debt to its investors, employees, and suppliers that it has become one of the most indebted company in the world (Wall Street Journal, 1). Here is the Wall Street Journal link of the main article I used for this discussion post (Mendell, 2). Evergrande is one of China’s biggest property developers and it has the biggest property sales in China. The company is so enormous that it is embedded across China’s financial system and economy which relies heavily on property for growth and jobs. Its financial troubles raised concerns not only for the Chinese economy, which is very much linked to real estate but also the global markets with S&P 500 seeing big swings in September.
What were the criticisms leveled against the company? Was it accused of being too conservative and hoarding too much cash, or of taking unnecessary risks such as being too highly leveraged? For Evergrande, it is the latter. Evergrande borrowed a lot of money in international financial markets. For years, it raised a lot of its cash by borrowing billions of dollars from banks and investors, and pre-selling unfinished apartments so it could aggressively take on more land and develop more projects in over 200 Chinese cities. It has around 800 projects underway all over China, where many of them have stopped. Problems started to emerge during pandemic lockdowns that hurt property sales for months, which snowballed into concerns about a cash crunch. Meanwhile, the Chinese government is cracking down on borrowing by real-estate developers – keeping the company out from taking on new debt (Yu & Yu, 3). Cash is short for the company in summer 2021 and it started to pay some suppliers with unfinished apartments instead of money. Mounting protests came from every direction, from suppliers, contractors, homebuyers, and small investors all around the country as the homes that are not completed – as well as employees. The company may owe tens of thousands of its employees’ money and even declared to them that those who wanted to keep their bonuses would have to give Evergrande a short-term loan (Stevenson & Li, 4). As paying cash to employees is a key part of operating activities (JWI531, 5), it is clear that the company is having a huge problem with its cash management.
How did the CFO or CEO address this criticism? Unfortunately for Evergrande, addressing the criticism is a matter of corrective instead of preventive action. Chinese authorities told Mr. Hui Ka Yan, the chairman of the company, and Mr. Xu Jiayin, the company’s founder, to use their personal wealth to alleviate the company’s deepening debt crisis (Bloomberg News, 6; Wang, 7). The company leadership seems to raise cash by starting to sell its assets (Wang, 7; Ng, 8). However, as mentioned, the company has also been reported to transfer this burden to its employees (Stevenson & Li, 4).
How has the stock performance been impacted by these cash management practices? The crisis still continues, the company’s stock is still on a downward trend.

Present three recommendations to management to address these criticisms.
It seems that the problem with Evergrande reaches beyond simple day-to-day cash management, but more to failure to manage business risks. Overexpansion without calculated risks, such as the Chinese government’s involvement, on top of the pandemic, led the company to the crisis it is experiencing today. Secondly, while it is true that being a capital-intensive business, like property, would require massive amounts of debt, instead of aggressively overexpanding, the company should have built the right balance on making new investments or expanding to new projects and preserving enough cash. As noted by Bragg, cash management is primarily about keeping cash reserves available for operational use; it is not about maximizing return on investment (Bragg, 9). Finally, monitoring is key. Evergrande has multiple businesses besides property; if the company had concentrated its cash from these multiple business line-ups – therefore, giving the management greater visibility of its cash position (JWI531, 5) – it would have aided the management’s decision-making process.
Best Regards,
Diandra
References:
Wall Street Journal. September 27, 2021. Why China’s Evergrande Has Global Markets on Edge. YouTube. https://www.youtube.com/watch?v=9BPgd2KdMRU
Erin Mendell. October 8, 2021. What Is China Evergrande, and Why Is Its Crisis Worrying Markets? The Wall Street Journal. https://www.wsj.com/articles/evergrande-china-crisis-11632330764
Xie Yu & Elaine Yu. September 18. 2021. How Beijing’s Debt Clampdown Shook the Foundation of a Real-Estate Colossus. The Wall Street Journal. https://www.wsj.com/articles/how-beijings-debt-clampdown-shook-the-foundation-of-a-real-estate-colossus-11631957400
Alexandra Stevenson & Cao Li. November 9, 2021. Evergrande Gave Workers a Choice: Lend Us Cash or Lose your Bonus. The New York Times. https://www.nytimes.com/2021/09/19/business/china-evergrande-debt-protests.html
JWI531. Week 07. Lecture Notes
Bloomberg News. October 26, 2021. China Urges Evergrande’s Hui to Pay Debt with His Own Wealth. Bloomberg. https://www.bloomberg.com/news/articles/2021-10-26/china-urges-evergrande-founder-to-pay-debt-with-personal-wealth
Selina Wang. November 10, 2021. Evergrande’s Billionaire Founder Has Been Bailing Out the Business. That Can’t Continue. CNN Business. https://www.cnn.com/2021/11/09/investing/china-property-crisis-evergrande-bail-out-mic-intl-hnk/index.html
Serena Ng. November 5, 2021. China Evergrande, Strapped for Cash, Offloads Its Jets. The Wall Street Journal. https://www.wsj.com/articles/china-evergrande-strapped-for-cash-offloads-its-jets-11636104601?mod=Searchresults_pos10&page=1
Steven M. Bragg. 2020. The CFO Guidebook

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