China’s embattled developer Evergrande is on the brink of default. Here’s why it matters.
Chinese property giant Evergrande is on the brink of collapse, and analysts warn the potential fallout could have far-reaching implications that spill outside China’s borders.
CCP provides false promises trying to delay Evergrande’s collapse
On September 23, Evergrande Group’s stock, which was facing collapse at any time, suddenly and unexpectedly rebounded strongly, with a maximum gain of over 30%! It closed at a 17% gain.
On Wednesday, Sept 22, Evergrande convened an emergency meeting with 4,000 executives promising to make every effort to complete the unfinished construction projects and deliver them smoothly with good quality. They also announce that the company would pay interests on two due debts on time.
There is also news that the CCP instructed local governments to minimize the impact of Evergrande’s default on the local economy, especially to prevent social unrest caused by unemployment. The local governments may intervene such unrest if necessary.
It seems the unexpected stock price recovery may be related to Evergrande and CCP’s bailout. But Mr. Guo Wengui revealed the truth in his Thursday’s live broadcast.
The CCP kleptocrats will use every power to prevent Evergrande Group’s sudden collapse. They will divide Evergrande’s big debt pie into pieces so that provinces and cities can absorb the debt problem locally. By turning Evergrande into a state-owned enterprise secretly, those shadow banks, insurance companies, trusts and other tens of trillions of debts would all been covered.
Evergrande will collapse and end badly. Xu Jiayin will not go to jail, instead probably suffer from an accidental death.
The end of Evergrande and its aftermath will be much worse than Lehman Brothers’.
Translated by: MOS Finance Team – Leah
Can China contain the Evergrande crisis?
It’s unlikely that Evergrande’s international bondholders are regular readers of the Global Times, the stridently nationalistic mouthpiece of the Chinese Communist Party.
But they probably took notice of a Global Times editorial published last Thursday that blasted US Secretary of State Antony Blinken for his comments urging China to act “responsibly” in addressing Evergrande’s liquidity crisis, which he warned could have profound ramifications for the entire world.
The Global Times was unimpressed. “China will not change its own pace of economic adjustment for the sake of external pressure or placating the market,” it shot back.
Evergrande’s problems, it said, were because of “its aggressive expansion on the back of high leverage and credit bubbles, a shared phenomenon among Chinese developers”. It was to stop this “reckless borrowing” that Chinese authorities last year unveiled the “three red lines” policy that limited how much Chinese property developers could borrow.
The Global Times editorial noted that Chinese authorities had not relaxed this policy, despite the Evergrande crisis, and “despite signs of softening throughout the real estate sector as a whole”.
This, it said, “is an indication that China has its own set of priorities and maintains the focus on deflating the real estate bubble and reducing risks”.
Of course, the last thing that Evergrande’s foreign bondholders want to be reminded of is Beijing’s commitment to deflating the country’s property bubble.
Especially at a time when they’re complaining that embattled Evergrande is showing little interest in meaningful engagement with the expensive investment banking and legal advisers they’ve hired to help them work through their options in the face of a looming Evergrande default.
Awash with speculation
Evergrande, which is China’s largest issuer of junk bonds with more than $US19 billion ($26 billion) in dollar-denominated debt, failed to make payments to offshore bondholders twice last month.
Last week, markets were awash with speculation that Evergrande was close to clinching a deal to sell a stake in its $US7 billion property management unit to rival Hopson Development, which could help ease its liquidity strains.
All the same, some of Evergrande’s US dollar-denominated bonds are now trading at between 15¢ and 25¢ on the dollar, suggesting that foreign creditors are pessimistic about how much they’ll be able to claw back from the ailing property developer.
They fear that Evergrande will use the cash raised from asset sales to repay Chinese banks. Late last month, Evergrande said it was selling a $US1.5 billion stake in a regional lender, but the bank insisted the money be used to repay debts the developer owed it.
Foreign investors worry that if Evergrande fails, they’ll be ranked low on the list of creditors when it comes to claiming any of the company’s assets.
And foreign investors’ anxiety about their exposure to the Chinese real estate market was exacerbated last week when a Chinese property developer, Fantasia, which specialises in high-end residential projects and luxury apartments, failed to repay a $US206 million five-year bond that matured last week.
Indeed, foreign investors have become so risk averse that yields on Chinese junk bonds have soared close to 20 per cent, the highest level in more than a decade.
So far, Beijing has maintained a stony indifference to the financial woes of foreign creditors.
Its priority has been on ensuring domestic stability. Evergrande relied heavily on raising cash by preselling apartments.
But that means it now has nearly 800 projects across China that are unfinished, with an estimated 1.5 million people who are waiting to move into their new homes. Beijing’s focus has been to finish these apartments, and to support Evergrande’s suppliers and contractors.
Property sales slump
Beijing’s efforts mean that China has averted a catastrophic collapse of China’s $US60 trillion property sector.
But Beijing’s refusal to come to the assistance of foreign creditors means that Chinese property developers are facing an intense liquidity squeeze.
Evergrande’s problems have shaken the faith of the home buyers who have become much more reluctant to pay upfront for yet-to-be-completed apartments. And this is already evident as property sales slumped last month, even though September is traditionally a strong month for property transactions.
According to Chinese real estate data collector, China Real Estate Information Corp, China’s top 100 property developers reported that sales last month were down 36.2 per cent from September 2020, compared with August’s 20.7 per cent slide.
But this slump in property sales, combined with a growing risk aversion on the part of foreign creditors means that Chinese property developers are facing a severe cash crunch.
As a result, they’ll be forced to jettison new developments while they focus on their own corporate survival. Already, there are growing fears there could be a wave of defaults among Chinese property firms next year.
This will inevitably cause China’s economic growth to slow abruptly, given that real estate and related services account for an extraordinarily high 25 per cent of the country’s gross domestic product.
And there could well be ripple effects as financial institutions respond to the abrupt economic slowdown by becoming more risk-averse, triggering a credit crunch for the entire economy.
According to US investment bank Goldman Sachs, a bearish scenario for the Chinese property market is that land sales and housing starts drop by 30 per cent, while property sales, house prices and completions drop 10 per cent from 2021 to 2022.
This, it estimates, would wipe 4 percentage points off China’s growth rate in 2022, and would lead to a significant tightening in Chinese financial conditions.
This tightening, it estimates, would be “of the same magnitude as the tightening in Goldman’s China Financial Conditions (FCI) from November 2017 to June 2018 when domestic credit tightening and the US-China trade war rattled the financial market significantly.”
Alarmed investors will no doubt recall that this earlier tightening of Chinese financial conditions reverberated through global financial markets.
Global equity markets experienced their worst year since the financial crisis in 2018, as investors were rattled by fears that global economic growth was slowing at the same time as the bitter trade war between the US and China was escalating.
The US S&P 500 index finished the year down 6.2 per cent, while China’s benchmark CSI 300 index plunged 26 per cent in 2018.
The turmoil in global markets came to an end in early 2019, when US central bank boss Jerome Powell abruptly changed course and signalled a halt to further US interest rate hikes.
By Karen Maley
What is Evergrande and is it too big to fail?
Global financial markets have been on high alert as cash-strapped Chinese property giant Evergrande faces several key tests in the coming days.
The world’s most indebted real estate developer is set to hit a series of deadlines for bond interest payments, totalling tens of millions of dollars.
As the company struggles to meet those payments, it has started to repay some investors in its wealth management business with property.
What does Evergrande do?
Businessman Hui Ka Yan founded Evergrande, formerly known as the Hengda Group, in 1996 in Guangzhou, southern China.
Evergrande Real Estate currently owns more than 1,300 projects in more than 280 cities across China.
The broader Evergrande Group now encompasses far more than just real estate development.
Its businesses range from wealth management, making electric cars and food and drink manufacturing. It even owns one of country’s biggest football teams – Guangzhou FC.
Mr Hui was once Asia’s richest person and, despite seeing his wealth plummet in recent months, has a personal fortune of more than $10bn (£7.3bn), according to Forbes.
Why is Evergrande in trouble?
Evergrande expanded aggressively to become one of China’s biggest companies by borrowing more than $300bn.
Last year, Beijing brought in new rules to control the amount owed by big real estate developers.
The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.
Now, it is struggling to meet the interest payments on its debts.
This uncertainty has seen Evergrande’s share price tumble by around 80% this year. Its bonds have also been downgraded by global credit ratings agencies.
Why would it matter if Evergrande collapses?
There are several reasons why Evergrande’s problems are serious.
Firstly, many people bought property from Evergrande even before building work began. They have paid deposits and could potentially lose that money if it goes bust.
There are also the companies that do business with Evergrande. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.
The third is the potential impact on China’s financial system.
“The financial fallout would be far reaching. Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms,” the Economist Intelligence Unit’s (EIU) Mattie Bekink told the BBC.
If Evergrande defaults, banks and other lenders may be forced to lend less.
This could lead to what is known as a credit crunch, when companies struggle to borrow money at affordable rates.
A credit crunch would be very bad news for the world’s second largest economy, because companies that can’t borrow find it difficult to grow, and in some cases are unable to continue operating.
This may also unnerve foreign investors, who could see China as a less attractive place to put their money.
Is Evergrande ‘too big to fail’?
The very serious potential fallout of such a heavily-indebted company collapsing has led some analysts to suggest that Beijing may step in to rescue it.
The EIU’s Mattie Bekink thinks so: “Rather than risk disrupting supply chains and enraging homeowners, we think the government will probably find a way to ensure Evergrande’s core business survives.”
Others though are not sure.
In a post on China’s chat app and social media platform WeChat, the influential editor-in-chief of state-backed Global Times newspaper Hu Xijin said Evergrande should not rely on a government bailout and instead needs to save itself.
This also chimes with Beijing’s aim to rein in corporate debt, which means that such a high profile bailout could be seen as setting a bad example.
Reporting by Peter Hoskins and Katie Silver