Evergrande teeters on the edge of collapse. Will China step in to avoid a ‘Lehman moment’?

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“Give us our money!”

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The chant echoed around the opulent Shenzhen headquarters of the Chinese property giant Evergrande Group. When police tried to pacify the crowd, protesters packed the lobby of the building, arguing furiously with company representatives – some of whom collapsed from exhaustion.

Evergrande, China’s second largest property developer, is on the verge of collapse. The company has liabilities of some US$300 billion, the first coming this week: US$83 million of interest payments on US$2 billion of bonds. Failure to make payment may result in the company facing default.

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Evergrande’s billionaire chairman Xu Jian has promised the company will be able to pay, writing in a note to employees that the firm will “soon move out of its darkest moments.” However, some have confidence in the prediction, and most investors are looking to aid rather than the Chinese government, hoping Beijing will be too big to thwart the asset giant and take steps to keep it afloat.

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Explainer: why Evergrande’s debt struggle is plaguing investors around the world

Failure to do so, some warn, would have a knock-on effect that could bring down the country’s entire real estate market. Adding to investor tensions is the fact that markets in China and Hong Kong are closed on Tuesday and Wednesday for the Mid-Autumn Festival holiday.

Since China legalized private home ownership in 1998, real estate has been one of the most successful sectors in the country – with nearly 90 percent of homes owner of a house – and the world’s largest wealth bubble. Chinese real estate is full of speculation, thanks to easy loans and massive supplies. in 2018In a nationwide study, some 50 million apartments, about 22 percent of the country’s total housing stock, were found to be sitting vacant.

Chinese officials have tried to rein in the area, repeatedly warning that “housing is for living, not speculation.” But most observers are skeptical that the government would be willing to allow house prices – which is 600 percent increase since 2010 And falls are the primary source of wealth for most families – significantly.

Evergrande epitomizes this problem. Analysts have long warned that the company was overextended, but continued to raise funds and expand into other areas. It owns more than 1,300 real estate projects in approximately 280 cities, and the company estimates that it creates 3.8 million jobs each year. It has stakes in everything from the Chinese Super League’s Guangzhou FC to bottled water, theme parks and electric vehicles.

However, the debt fueling this expansion is due. according to bloombergIn addition to the US$83 million to be paid out this week, Evergrande has a US$669-million payout by the end of the year. As of early next year, the company has US$3.45 billion in outstanding bonds due. Caixin, a leading Chinese trade publication, is informed of Evergrande “contacted every possible buyer” to sell some of its largest properties, but “no deal has been reached.”

Homeowners and retail investors were among those who gathered at the company’s headquarters and offices in China last week, demanding repayment or assurances that their homes would be built. According to a post on Evergrande’s official WeChat account, this week, the company announced investors in overdue investment products with exempt assets after top executives publicly signed a “military order” to complete all unfinished property developments. started paying.

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While the collapse of Evergrande would cause immediate misery among Chinese homeowners and workers, the fear is that, as a loss to the company’s lenders and bondholders, China’s entire real estate market could stumble – in the same way as That the collapse of Lehman Brothers spurred a slide in the US housing market in 2008 sent the US economy into recession.

Investors are already feeling the pain: Chinese and Hong Kong real estate stocks fell, and the Hang Seng index, which lists Evergrande, fell 3 percent on Monday, while other markets around the world also fell. Seen as investors rushed to sell the riskier reals. property product.

“Evergrande has the potential to be the largest corporate loan default ever, with spillovers to other financial institutions, Evergrande’s suppliers, homeowners, wealth product holders and other property companies,” said Alan Ruskin, macro strategist at Deutsche Bank. “Not surprisingly, analysts are running around for touch points where Evergrande could trigger contagion within China and internationally.”

Beijing is not ideologically opposed to interventions to shore up markets – it has done so in the past – but regulators may fear that moving Evergrande may send the wrong message, given that they risk Broken elsewhere on full investments and excessive borrowings. In fact, it was this clout that helped fuel Evergrande’s woes.

Regulators last year introduced “three red lines,” limits on the debt-to-asset ratio, debt-to-equity ratio and cash-to-short-term-debt ratio, for property developers. Analysts warn that Evergrande has crossed at least two of these red lines, and that its actual indebtedness could be even higher.

But most observers agree that Beijing will not stand up and allow Evergrande to become the country’s “Lehmann moment”, where the broader economy is stymied while allowing some, such as private banks and small property firms, to intervene. It is necessary to edge.

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Analysts from the Economist Intelligence Unit said in a note that “given the sheer size of Evergrande, debt restructuring is more likely than outright bankruptcy, authorities have intervened by directing banks to allow payment extensions.

“The commitment of central authorities to contain the financial transition will ensure a degree of state intervention, but officials will be wary of increasing the moral hazard,” EIU analysts said. “As a result, even if Evergrande is bailed out, some smaller developers are likely to collapse.”

Bill Bishop, a Chinese analyst and author of the Synosism newsletter, wrote this week that the “advantage” of the Chinese system in dealing with messes like Evergrande is that regulators have significant powers to ‘feel’ helping other companies. , and a robust sustainability maintenance system to ensure that creditors, employees and apartment buyers will accept the best haircut on offer and not fuss too much.

“Yes, there have been small protests, but if things go on as they have in other similar cases, the protest will be allowed for a while, as people need to step out, then warned the organisers. That if not arrested, the rest of the grieving people will take what is offered to them and ‘love it,’ without recourse, he wrote. “Equity owners and foreign creditors don’t really fit into that equation, they won’t get anything.”

With reporting from Reuters

Our Morning Update and Evening Update newsletters are written by Granthshala editors, giving you a brief summary of the day’s most important headlines. .

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