Evergrande halted trading of its shares on Monday amid news it missed another major bond interest payment, bringing the troubled Chinese real estate giant closer to default.
Evergrande, the world’s most indebted property developer, has been on the verge of collapse for weeks, as it struggles to address nearly US$305 billion in liabilities, much of it offshore. The company’s debt amounts to 2 percent of China’s total GDP, prompting fears that a collapse could spread through the financial system and resonate around the world, despite the central bank vowing to protect homebuyers’ interests. Anxiety has reduced somewhat after eating.
A possible means of doing so emerged on Monday, as it was reported that fellow Guangdong-based property developer Hopsan Development was to acquire 51 percent of Evergrande Property Services in a deal worth approximately US$5.14 billion.
In a statement to the Hong Kong Exchange on Monday, Evergrande Property Services said there was a “potential general offering for shares of the company”. Trading in its shares was suspended in accordance with takeover rules, along with Hobson and parent company China Evergrande Group.
Evergrande Property Services operates in more than 290 cities in China and is contracted to manage more than 1,500 projects nationwide, which, according to its website, include “medium and high-end residential buildings, commercial properties, theme parks, industrial including parks, health care complexes, themed towns and schools.”
“It seems that the asset management unit is the easiest one to settle in the grand scheme of things, which is trying to generate near-term cash for the company,” said OCBC analyst Ezine Hu. “I’m not sure if this means the company has ceased to survive, especially selling an asset that means they are still trying to raise cash to pay the bills.”
Hong Kong shares plunged on Monday, extending a four-month path, as the Hang Seng index fell to its lowest level since October last year. Japanese shares also ended lower, and European shares struggled after opening Monday.
News of Evergrande’s possible collapse stirred markets around the world last month, amid fears of a potential “Lehman Moment” similar to the way the collapse of US bank Lehman Brothers foreshadowed the 2008 financial crisis.
Evergrande’s massive over-leveraging is typical of China’s real estate market, which officials have been trying to rein in for years, with rising property prices and potential economic damage that could lead to a crash.
Last year, the Chinese government introduced three “red lines” for property developers, requiring them to keep debt levels within reasonable limits. Evergrande was breaching all three, and soon found itself unable to raise much capital, even at one point allegedly contacting employees to loan the company money.
“The biggest problem is not the default by Evergrande, but the environment that has led to its downfall. Authorities are regulating housing loan and lending to property firms. Markets are already looking for the next Evergrande,” said Kazutaka Kubo, senior economist at Okasan Securities.
“There is a growing risk that Evergrande’s crisis will spread to the entire Chinese property sector.”
While the Chinese government is believed to be wary of ousting Evergrande, for fear it might send the wrong message, Paul Schulte, a former investment banker and founder of Schulte Research, said the company’s liabilities are “going to come out of someone”. pocket.”
“You have to put the debt somewhere, you can’t put the toothpaste back in the tube,” he said. “Either the banks are going to eat it, or the people who bought the house, or the government, or foreigners” [bond holders]”
Although he said it is likely “a savior is coming in a major asset player,” Mr Schulte predicted that the government will nonetheless have to “put some of this debt on the sovereign balance sheet.”
“We are meeting for a solution,” he said. “When people are in a state of maximum panic, when you are going to get a solution… China has no interest in the crisis. America jumps from crisis to crisis, China doesn’t crisis, they want things to be smooth.
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