EXPLAINER: Chinese automaker’s debt fight shakes investors


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BEIJING – Global investors anxiously watch one of China’s largest real estate developers attempt to avoid default on its mountain of $ 310 billion in debt.

Evergrande Group, which strives to turn assets into cash, rocked financial markets on Friday when it warned it could run out of money. He said missing payments on bonds or other debts could trigger an avalanche of demands for immediate payment of other debts.

The ruling Communist Party can keep credit markets functioning but will not bail out Evergrande, which the central bank accuses of recklessly borrowing, economists say. They say that would be a bad signal at a time when Beijing is trying to force companies to cut dangerously high debt levels.

Evergrande said on Friday it received a demand to repay a $ 260 million bond and could not guarantee it would be able to meet its debts.

The central bank and banking regulator have rushed to reassure the public that the Chinese economy can be shielded from Evergrande’s problems. They promised to keep credit markets functioning.

A look at Evergrande and his debt anxiety:

WHAT IS EVERGRANDE?

Evergrande Group, founded in 1996, is one of the largest Chinese manufacturers of apartments, office towers and shopping centers.

The company says it has more than 200,000 employees and supports 3.8 million jobs in construction and other industries. Evergrande claims to have 1,300 projects in 280 cities and assets worth 2.3 trillion yuan ($ 350 billion).

Evergrande founder Xu Jiayin was China’s richest entrepreneur in 2017 with a net worth of $ 43 billion, according to the Hurun Report, which tracks China’s rich. It fell to the bottom of the list as internet industries boomed, but still ranked among China’s richest real estate developers last year. He also topped Hurun’s list of philanthropists in 2020, donating around 2.8 billion yuan ($ 420 million).

Evergrande has diversified into electric vehicles, the development of theme parks, health clinics, mineral water and other businesses.

WHAT IS THE IMPACT SO NOW?

Hong Kong-traded Evergrande shares have fallen 90% this year. Its bonds trade at a discount of 75% from their face value.

Xu built Evergrande with borrowed money. The company says it owes 2,000 billion yuan ($ 310 billion) to bondholders, banks, construction contractors and other creditors.

In June, she said she owed 240 billion yuan ($ 37.3 billion) of that amount in one year, nearly triple the 86.8 billion yuan ($ 13.5 billion) in cash. of the society.

Evergrande reported first-half profit of $ 1.4 billion, but says sales declined because news of its cash crunch made buyers nervous.

WHY NOW?

Evergrande has been constrained by limits imposed last year on real estate-related borrowing.

Economists warn that China’s growing debt has been a threat for more than a decade. Reducing financial risks has been a priority for the ruling party since 2018. But total corporate, government and household borrowing reached the equivalent of nearly 300% of annual economic output last year, which is unusually high for a middle-income country.

News reports indicate that Evergrande borrowed wherever it could, including demanding employees of its construction contractors to buy back its debt. The central bank, in unusually scathing comments, said on Friday that its problems were due to “mismanagement and indiscriminate expansion.”

In 2017, the state-owned China Citic Bank of Shenzhen agreed to lend 40 billion yuan ($ 6.2 billion) for an Evergrande project only after its executives agreed to invest at least 3 million yuan (465 000 dollars) each, according to the economic news magazine Caixin.

HOW DOES THIS FIT INTO THE PARTY’S PLANS TO REBUILD THE CHINESE ECONOMY?

China’s economic boom was propelled by a building frenzy that wiped out cities into new apartments, malls and other buildings. Now the ruling party wants to change course and promote self-sustaining economic growth based on domestic consumption rather than trade and investment.

The first default by Chinese companies since the 1949 revolution was cleared in 2014 as part of efforts to force borrowers and lenders to be more disciplined. Until then, insolvent borrowers were bailed out by the government to avoid scaring the financial markets. Beijing has gradually allowed more defaults, but none from such a large debtor as Evergrande.

AND THE OTHER DEVELOPERS?

Other big developers such as Vanke Co., state-owned Poly Group, and Wanda Group have yet to report similar issues. But hundreds of small developers have closed since regulators tightened control in 2017 over fundraising tactics like selling apartments before construction begins.

Residential real estate is considered low risk to the financial system, as most apartments are purchased with cash and not with mortgages. This makes a wave of foreclosures and stress on banks like in the United States after the 2008 crisis unlikely.

A mid-sized developer, Fantasia Holdings Group, announced on October 5 that it had failed to make the $ 205.7 million payment owed to bondholders. Another, Kaisa Group Holdings Ltd., has warned it may default on a $ 400 million bond owed this week.

With the possible aim of showing that the industry is in good health, others have been allowed to issue new debts. Total bonds sold in November rose 84% from the previous month to 47.1 billion yuan ($ 7.4 billion), according to the China Securities News newspaper.

IS THERE A RISK OUTSIDE OF CHINA?

Investors are worried about the potential global impact, but economists say Evergrande will not become China’s ‘Lehman moment’, referring to the bankruptcy of Wall Street bank Lehman Brothers in 2008, the symbolic start of the global crisis.

Evergrande owes owners of foreign currency bonds $ 18 billion, but much of that is held by Chinese banks and other institutions. Unlike Lehman, whose assets were financial instruments whose prices can fluctuate wildly, Evergrande owns 1.4 trillion yuan ($ 215 billion) of land and partially completed projects with relatively stable prices.

Even an outright default “should be a very short hiccup, lasting about a week” in financial markets, “so not really anything like Lehman,” said ING economist Iris Pang.

In case Evergrande is unable to repay the loans, China’s public banking sector has a total annual profit of 1.9 trillion yuan ($ 300 billion) and reserves of 5.4 trillion yuan ($ 850 billion) against the loan losses.

AND THE NEXT?

Regulators appear to be focused on ensuring homebuyers get the apartments they have paid for and preventing financial surprises.

Evergrande has set up a “risk management” panel with experts from other companies. The government of his home province of Guangdong is sending a team to Evergrande headquarters to oversee operations. Cities and provinces with Evergrande projects have set up teams to control their finances.

The government is also promising measures to support economic growth which hit an unexpected year-over-year low of 4.9% earlier in the quarter ending September due to the slowdown in construction and real estate sales.

On Monday, the central bank increased the amount banks have available for loans by 1.2 trillion yuan ($ 190 billion).

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