Evergrande’s latest update is bad news for Australia

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In an official call with offshore creditors on Tuesday, the embattled Chinese property company, Evergrande, provided some good news to compensate for the inevitable distress they felt on learning that bankers had seized billions of dollars of cash from its Hong Kong listed subsidiary.

In the course of the call, Evergrande executives told offshore creditors that it had resumed construction on about 80 per cent of its projects as of February, and had announced 353 new projects since the beginning of 2022.

What’s more, Evergrande, which defaulted on offshore bond payments last December and is now working on a global restructuring plan under Beijing’s watchful eye – had reached agreements with around 70 per cent of its contractors to keep working on existing and new real estate projects.

Now, it’s unlikely that this update from Evergrande – which is the world’s most debt-laden property developer, with more than $US300 billion ($402 billion) in liabilities – did much to lighten the dismal mood of its offshore bondholders.

But what is certain is that Evergrande’s update is definitely bad news for Australia’s mining giants.

Because it confirms that Chinese property developers – even those suffering from intense financial strains – are racing to complete partly completed construction projects, so they can sell apartments, and use the proceeds to pay down their debts.

Now, this massive drive by debt-laden Chinese real estate companies to complete their unfinished construction projects is providing a huge support for the price of Australia’s most important export – iron ore – which is presently trading at around $US143 a tonne.

The problem is that when these part-finished residential projects finally reach completion, Chinese demand for key commodities is likely to drop sharply. Developers, facing acute funding shortages, are reluctant to commit to new projects.

And it’s unlikely that Beijing’s increased infrastructure spending will be enough to offset the collapse in demand from the country’s property sector, which is estimated to account for about 30 per cent of China’s total economic output.

Already, the rush by Chinese developers to complete, and offload, apartments is putting downward pressure on Chinese property prices, particularly in third- and fourth-tier cities.

According to the official statistics, Chinese housing prices have stabilised, with the average new home price up 1.2 per cent in February from a year earlier.

But analysts say this resilience reflects the strength of the housing market in China’s largest and richest cities, such as Beijing, Shanghai and Shenzhen.

In less affluent cities, however, there are growing signs of pressure.

Industry giant, Country Garden Holdings, which is seen as one of China’s more financially robust developers, reported a 14 per cent decline in its average selling price in January and February from the same two months in 2021.

At the same time, a midsize developer, Logan Group, said its average selling price tumbled close to 40 per cent in the first two months of 2022 compared with the same period a year earlier.

According to analysts, property developers – which have seen borrowing costs rise sharply in offshore funding markets – are increasingly rushing to sell apartments to raise cash and avoid default.

Meanwhile, the latest announcement from Evergrande will ease the funding pressure on Chinese developers.

In a filing to the Hong Kong stock exchange on Tuesday, Evergrande said that bankers to one of its key subsidiaries had taken over 13.4 billion yuan ($2.8 billion) in cash that had been pledged as security for “third party guarantees”.

Evergrande executives warned there may be additional pledges and guarantees made from the company’s offshore subsidiaries to onshore entities, which will further reduce how much creditors will receive back from their loans.

This update is bad news for Evergrande’s offshore bondholders, because it makes it likely they’ll suffer even more punishing losses on their loans. One of the company’s US dollar bonds, which matures in 2025, is now trading at 13 cents on the dollar.

Even worse, Evergrande’s filing highlights the huge problem of the hidden debts – previously undisclosed off-balance sheet liabilities – that Chinese property developers are carrying.

By Karen Maley
Financial Review

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