Chinese property developer’s debt struggle rattles investors

ONE OF China’s biggest real estate developers is struggling to avoid defaulting on billions of dollars of debt, prompting concern about a broader economic fallout and protests by buyers of unfinished apartments.

Evergrande Group appears likely to be unable to repay all of the equivalent of US$89 billion it owes banks and other bondholders, financial rating agencies say. That might jolt financial markets, but analysts say Beijing is likely to step in to prevent wider damage if Evergrande can’t manage an orderly resolution of its debts.

“In the unlikely event that a default unsettles the broader property market, significantly disrupting sales and investment, this could have farther-reaching macroeconomic effects,” said Fitch Ratings analysts in a report Wednesday.

Evergrande ran into a cash crunch after its borrowing to build apartments, office towers and shopping malls collided with pressure from the ruling Communist Party to reduce corporate debt loads that are seen as a threat to the economy.

Beijing has made reducing financial risk a priority since 2018. In 2014, authorities allowed the first corporate bond default since the 1949 communist revolution. Defaults have gradually been allowed to increase in hopes of forcing borrowers and investors to be more disciplined.

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

Evergrande’s struggle has prompted warnings abroad that a broader financial squeeze on real estate – an industry that propelled China’s explosive 1998-2008 boom – could lead to trouble for banks and an abrupt and politically dangerous collapse in economic growth.

An outright default might dent consumer confidence if homebuyers suffer losses, “but we assume the government would act to protect households’ interests, making this outcome unlikely”, Fitch analysts said.

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

The companies were told to limit debt relative to “three red lines” – cash on hand, the value of their assets and equity in their businesses. Banks are required to limit real estate lending to 40% of their total under rules that took effect in January.

In addition to bondholders, the company owes US $103 billion to construction companies and other business creditors.

Its share price in Hong Kong plunged 34 per cent to an all-time low on Wednesday. It has fallen 50 per cent over the past month.

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

A financial information 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 that.

As of June 30, Evergrande had 240 billion US$37.3 billion of debt due within a year, down 28.5 per cent from the end of 2020 but nearly triple its cash holdings of US$13.5 billion, according to a company financial report.

Early this week, about 100 people who invested in Evergrande 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 repaid in property, cash in instalments or a claim to payments on residential units, according to the business magazine Caixin.

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

Evergrande also sank money into launching its own electric vehicle brand, a priority in the ruling party’s technology plans. It said this week it was making no progress in selling stakes to outside investors.

Other major Chinese developers do not appear to be facing the same cash crunch. But other companies are struggling with debt.

Huarong Asset Management Co, Ltd, the biggest of a group of state-owned companies created to help resolve bad loans held by state banks, reported in August that it lost US$15.9 billion last year.