Chinese property developer’s debt struggle stuns investors

By The Associated Press

BEIJING: One of China’s biggest real estate developers is struggling to avoid defaulting on billions of dollars in debt, raising concerns about a wider economic fallout and protests by unfinished apartment buyers.

Financial rating agencies say Evergrande Group appears to be unable to pay all 572 billion yuan ($89 billion). It could jolt financial markets, but analysts say Beijing could take steps to prevent widespread damage if Evergrande cannot manage a systematic resolution of its debts.

“In the unlikely event that a default destabilizes the broader asset market, significantly disrupts sales and investments, could have far-reaching macroeconomic implications,” analysts at Fitch Ratings said in a report on Wednesday.

Evergrande ran into a cash crunch after borrowing to build apartments, office towers and shopping malls, under pressure from the ruling Communist Party to reduce the corporate debt load seen as a threat to the economy. bumped up.

Beijing has made mitigating financial risk a priority since 2018. In 2014, the authorities allowed the first corporate bond default since the Communist Revolution of 1949. Defaults have been allowed to escalate gradually, hoping to force borrowers and investors to be more disciplined.

Despite this, total corporate, government and household debt rose from the equivalent of 270% of annual economic output in 2018 to nearly 300% last year, unusually high for a middle-income country. Economists say a financial crisis is unlikely, but debt could stifle economic growth by diverting money from consumption and investment.

Evergrande’s struggle abroad has warned that a widespread financial squeeze on real estate – an industry that prompted China’s explosive 1998-2008 boom – could spell trouble for banks and lead to a sudden and political spurt in economic growth. Dangerous collapse can result.

The government has yet to say what it can do about Evergrande, one of China’s largest private sector conglomerates, but financial analysts say Beijing is likely to intervene, especially to protect those homes. For those who have bought unfinished apartments.

Analysts at Fitch said an outright default could undermine consumer confidence if homebuyers suffer, “but we believe the government will act to protect the interests of households, making this outcome less likely.” “

President Xi Jinping is promoting a “shared prosperity” initiative to spread China’s wealth more widely and reduce the politically unstable gap between a wealthy elite and a poor majority. So regulators may favor home buyers at the expense of banks and other investors in Evergrande loans.

Headquartered in the southern city of Shenzhen near Hong Kong, Evergrande has sold assets to pay off debt since regulators tightened financing controls for China’s 12 biggest developers in August 2020.

Companies were asked to limit debt relative to the “three red lines” — cash, the value of their assets and equity in their businesses. The rules that went into effect in January require banks to limit real estate lending to 40% of their total.

In addition to bondholders, the company owes 667 billion yuan ($103 billion) to construction companies and other business creditors.

Its share price in Hong Kong fell 34% on Wednesday to its lowest level ever. It has fallen by 50 per cent in the last one month.

Evergrande reported a profit of $1.6 billion for the first half of 2021. In a statement on Tuesday, it said it has hired outside experts in debt restructuring. On Monday, the company denied that it would apply for a corporate restructuring under China’s bankruptcy law.

A financial information service, REDD, reported last week, citing unnamed sources, that Evergrande would suspend interest payments on loans to two banks. The company has not yet confirmed this.

According to the company’s financial report, as of June 30, Evergrande had 240 billion yuan ($37.3 billion) in debt within a year, down 28.5% from the end of 2020, but with 86.8 billion yuan ($13.5 billion) of its own debt. Cash holdings nearly tripled. .

On Sunday, nearly 100 people who had invested in Evergrande loans through “wealth management products” sold by banks, crowded the Shenzhen headquarters to demand repayment.

The company said those investors can choose to claim the property to be repaid, cash in installments or pay on residential units, according to trade magazine Caixin.

“It is difficult for Evergrande to pay 40 billion yuan ($6.2 billion) at a time for wealth management products,” Du Liang, head of Evergrande’s wealth management unit, was quoted as saying.

On Friday, apartment buyers protested at its headquarters complaining of Evergrande’s suspended construction, according to Hong Kong news reports. The company also faces lawsuits by construction contractors who say it has delayed paying them.

Evergrande also invested money in launching its own electric vehicle brand, a priority in the ruling party’s technology plans. It said this week it was not making any progress in selling stakes to outside investors.

Other major Chinese developers are not facing the same cash crunch. But other companies are grappling with debt.

Huarong Asset Management Co., Ltd., the largest of a group of state-owned companies created to help resolve bad loans held by state banks, reported in August that it had committed 102.9 billion dollars last year. yuan ($15.9 billion).

According to financial information company Capital IQ, Huarong’s debt stood at $162.3 billion in mid-2020. However, Huarong said it has no plans to restructure after receiving capital injections from state-owned companies in August.

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