BEIJING – One of China’s largest real estate developers is struggling to avoid defaulting on billions of dollars in debt, sparking concerns over wider economic fallout and protests from buyers of unfinished apartments.
Evergrande Group appears to be unable to repay all of the 572 billion yuan ($ 89 billion) it owes banks and other bondholders, according to financial rating agencies. It could shake up financial markets, but analysts say Beijing is likely to step in to avoid greater damage if Evergrande fails to manage an orderly resolution of its debts.
“In the unlikely event that a default disrupts the housing market as a whole, significantly disrupting sales and investment, it could have broader macroeconomic effects,” Fitch Ratings analysts said in a report on Wednesday.
Evergrande experienced a cash shortage after its loans to build apartments, office towers and shopping centers met pressure from the ruling Communist Party to reduce corporate debt, seen as a threat to the government. economy.
Beijing has made reducing financial risk a priority since 2018. In 2014, authorities authorized the first default on corporate bonds since the communist revolution of 1949. Defaults have gradually increased in hope to force borrowers and investors to be more disciplined.
Despite this, total corporate, government and household debt fell from the equivalent of 270% of annual economic output in 2018 to almost 300% last year, an unusually high level for a middle-income country. . Economists say a financial crisis is unlikely, but debt could hold back economic growth by diverting money from consumption and investment.
Evergrande’s struggle has sparked overseas warnings that a wider financial squeeze on real estate – an industry that propelled China’s explosive boom from 1998 to 2008 – could lead to problems for banks and a brutal and politically dangerous collapse of economic growth.
The government has yet to say what it might do about Evergrande, one of China’s largest private sector conglomerates, but financial analysts say Beijing is likely to step in, especially to protect households who bought unfinished apartments.
An outright default could undermine consumer confidence if homebuyers suffer losses, “but we assume the government would act to protect household interests, making that outcome unlikely,” Fitch analysts said. .
President Xi Jinping is promoting a “common prosperity” initiative to spread China’s wealth more widely and narrow its politically unstable gap between a rich elite and the poor majority. Thus, regulators may favor homebuyers at the expense of banks and other investors in Evergrande debt.
Based in the southern city of Shenzhen, near Hong Kong, Evergrande has sold assets to repay debt since regulators in August 2020 tightened funding controls for China’s 12 biggest developers.
Companies have been urged to limit debt against the “three red lines” – cash, asset values, and corporate equity. Banks are required to limit home loans to 40% of their total under rules that came into effect in January.
In addition to bondholders, the company owes 667 billion yuan ($ 103 billion) to construction companies and other commercial creditors.
Its Hong Kong share price plunged 34% to an all-time low on Wednesday. It has fallen by 50% over the past month.
Evergrande announced a profit of $ 1.6 billion for the first half of 2021. In a statement released Tuesday, it said it had hired outside debt restructuring experts. On Monday, the company denied that it would seek a business restructuring under China’s bankruptcy law.
A financial reporting service, REDD, reported last week, citing unidentified sources, that Evergrande would suspend interest payments on loans to two banks. The company has yet to confirm this.
As of June 30, Evergrande had 240 billion yuan ($ 37.3 billion) in debt due within a year, down 28.5% from the end of 2020, but nearly triple its liquidity of 86 , 8 billion yuan ($ 13.5 billion), according to a company financial report. .
On Sunday, around 100 people who invested in Evergrande’s debt through “wealth management products” sold by banks crowded into its Shenzhen headquarters to demand repayment.
The company said those investors can choose to be reimbursed in property, cash in installments or by claiming payments on residential units, according to business magazine Caixin.
“It is difficult for Evergrande to repay 40 billion yuan ($ 6.2 billion) at one time for wealth management products,” said the head of Evergrande’s wealth management unit, Du Liang. .
On Friday, apartment buyers complaining of a suspension of construction on Evergrande demonstrated at its headquarters, according to reports from Hong Kong. The company is also facing legal action from construction contractors who claim they have delayed their payment.
Evergrande has also invested money in launching its own brand of electric vehicles, a priority in the ruling party’s tech plans. He said this week that he was making no progress in selling stakes to outside investors.
The other big Chinese developers don’t seem to be facing the same lack of cash. But other businesses are struggling with debt.
Huarong Asset Management Co., Ltd., the largest of a group of state-owned companies created to help resolve bad debts held by state-owned banks, in August said it had lost 102.9 billion yuan ( $ 15.9 billion) last year.
Huarong’s debts stood at $ 162.3 billion in mid-2020, according to financial information firm Capital IQ. However, Huarong said he had no plans to restructure after receiving a capital injection in August from state-owned enterprises.