China Evergrande Group's High-Leverage Capital Structure: Formation Logic and Risk Evolution from a Corporate Finance Perspective

The real estate sector is by nature capital-intensive, and high leverage has long been a standard practice for property developers across global markets. In China, the debt-fueled high-turnover growth model has backed the rapid expansion of the property industry for decades, but it has also built up considerable hidden debt risks. The launch of the "Three Red Lines" regulatory policy in 2020 has sharply tightened financing rules for developers, and the risks tied to extreme leverage strategies have gradually come to the surface. As the most representative player with an aggressive leverage strategy in the industry, China Evergrande Group's 2021 debt default has become a landmark case of corporate financial distress. This paper uses a literature review combined with case study analysis, and draws on trade-off theory and financial distress cost frameworks, supplemented by an accounting perspective, to explain how Evergrande's high-leverage capital structure formed and how its risks evolved and spread. The study finds that Evergrande's leverage level moved far past the optimal range predicted by traditional theory, pushed by scale expansion incentives, implicit expectations of policy support, and internal managerial agency problems. Accounting tools such as off-balance-sheet financing further hid the true size of its debt burden. Once external financing conditions tightened, accumulated risks set off a spiral of rising financial distress costs, which eventually grew into a full-scale liquidity crisis.