The bailout of beleaguered Chinese real estate company Evergrande appears to have stalled, leaving the developer on the brink of default and threatening to unleash contagion through the country’s massive real estate sector, home prices and the economy.
The troubles surrounding Evergrande, which has a total debt of $ 305 billion, have gripped global financial markets in recent weeks and helped slow China’s post-pandemic recovery.
But the crisis could deepen even further if Evergrande misses a Saturday night deadline to pay a bond interest payment of $ 83.5 million, leading to an official default.
Evergrande has already been given a 30-day grace period to make the refund after missing the initial deadline in September. Since then, it has made no other key overseas dollar-denominated bond payments worth another $ 193.3 million. The clock is now ticking on those debts as well.
The sprawling electric car ownership empire founded by former steel executive Xu Jiayin in the mid-1990s has been struggling to ditch assets to pay off some of its loans. Its Chinese creditors are expected to be prioritized, with foreign investors at the bottom of the queue.
Shares of its main listing in Hong Kong have lost 80% last year and have been suspended since October 4 pending an announcement on how they will be rescued.
But there were indications that the process has not been executed as planned, raising the possibility that Beijing will be forced to engineer a decommissioning of Evergrande, the country’s second-largest developer, absorbing most of it in existing state-owned companies.
First, Evergrande’s negotiations to sell its 51% stake in its profitable property management unit, Evergrande Property Services Group, to another Chinese developer for $ 2.6 billion have been suspended, according to reports. The buyer, Hopson Development Holdings, was unable to obtain the necessary agreement from the Guangdong provincial government, which is overseeing the restructuring of Evergrande.
The sale of the 26-story waterfront Evergrande headquarters in Hong Kong was expected to raise another $ 1.7 billion, but the deal with Yuexiu has also been suspended for the same reason.
The state of the housing market, which accounts for about 25% of the Chinese economy, provides an alarming backdrop to these problems. Home sales by value fell 16.9% in September from a year earlier, after a 19.7% drop in August, according to Bloomberg calculations based on official data released Monday.
With many other developers also feeling the pressure and struggling to repay loans, Evergrande’s potentially colossal default could overturn the weakest and most indebted parts of the real estate sector.
China Properties joined a dozen others that have defaulted on more than 47 billion yuan ($ 7.3 billion) of bonds this year, according to an estimate by CRIC, a Chinese real estate consultancy, Reuters reported on Friday. Last week, S&P Global downgraded two of the biggest players, Greenland, which has major developments in London, Sydney and New York, and E-house Enterprise.
A smaller developer, Sinic Holdings, became the latest to have its “selective default” rating from the S&P after it defaulted on $ 246 million in bonds, having warned it was likely to do so last week. pass.
Terry Chan, a senior researcher at S&P Global Ratings, said the situation risked exposing other large Chinese companies that have expanded equally rapidly in the wake of three decades of blistering debt-driven economic growth.
“If Evergrande defaults, there can be spillovers to other developers, home prices, and the economy. Evergrande’s cash flow problems portend what could go wrong for cash-strapped Chinese companies, ”he said.
China’s corporate sector accounts for nearly a third (31%) of global corporate debt, according to an S&P survey of 25,000 companies around the world. The sector’s debt-to-GDP leverage ratio of 159% is one of the highest in the world (current global ratio is 101%) and presents a staggering $ 27 trillion headache for Beijing.
Chinese President Xi Jinping has shown in recent years that he is determined to tackle the problem while pursuing his goal of “common prosperity.” He has clipped the wings of tech billionaires like Jack Ma with companies forced to divest assets and cede control of data to regulators. Highly profitable private tutoring services, loved by ambitious parents living in the city of China, have also been banned.
Now, the “speculative” model of the real estate sector is in Xi’s crosshairs. Last year’s “three red lines” for balances made it much more difficult for big developers like Evergrande to secure funding to keep plates spinning on their borrow and build model.
However, Angus Coote of Jamieson Coote Bonds in Melbourne, Australia, said China’s central bank was “at the forefront”, flooding the market with liquidity – another 100 billion yuan ($ 15.6 billion) on Wednesday. – and that it would contain the contagion.
“Banks have been told to keep lending to healthy developers,” he said. “The biggest ones can cause a domino effect… but our opinion is manageable without any contagion. Beijing is going to disappoint him little by little ”.
Helge Berger, director of the Chinese branch of the International Monetary Fund, told Bloomberg that the risks to the economy in general had been “contained” (£) for now, but authorities should continue to monitor in case of escalation.
George is Digismak’s reported cum editor with 13 years of experience in Journalism