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How China Evergrande’s Debt Problems Pose Systemic Risk, Real Estate News, ET RealEstate

HONG KONG: China Evergrande Group has issued new warnings regarding the risks of default due to late payments for wealth management and trust products.

The real estate giant has struggled to raise the funds it needs to pay lenders and suppliers, regulators and financial markets fearing that a crisis will spill over into China’s banking system and potentially trigger crises. wider social unrest.

Who is Evergrande?

Founded in 1996 by President Hui Ka Yan in the southern city of Guangzhou, Evergrande has accelerated its growth over the past decade to become China’s second-largest real estate developer with $ 110 billion in sales last year.

The company was listed in Hong Kong in 2009, giving it better access to capital and debt markets to increase its asset size to $ 355 billion today. It has more than 1,300 developments across the country, many in lower-tier cities.

With domestic sales growth slowing in recent years, Evergrande has also embarked on non-real estate businesses, such as electric cars, football, insurance and bottled water.

How did the concerns arise about the pile of debt?

Investors became concerned after a letter leaked in September showed Evergrande sought government support to approve a now-abandoned backdoor listing plan, warning it was facing a cash shortage.

Concerns escalated after Evergrande admitted in June that it failed to pay certain commercial bills on time, and in July a Chinese court froze a $ 20 million bank deposit held by the company at the request of Guangfa Bank.

Evergrande’s rapid expansion over the years has been fueled by debt. He aggressively raised loans to support his land-buying frenzy and sold apartments quickly despite low margins to get the cycle back on track.

The company’s interim report says its interest-bearing debt stood at 571.8 billion yuan ($ 89 billion) at the end of June, up from 716.5 billion at the end of 2020, as it stepped up its debt reduction efforts.

Total liabilities, which include debts, however edged up to 1.97 trillion yuan, accounting for about 2% of the country’s GDP.

In addition to the usual banking and bond channels, the developer has come under fire for tapping into the less regulated shadow banking market, including trusts, wealth management products and commercial paper.

What has Evergrande done to get out of debt?

Evergrande stepped up efforts to reduce debt last year after regulators introduced caps on three debt ratios dubbed the “three red lines” policy. He said he aimed to meet all requirements by the end of next year.

Evergrande has given buyers significant discounts for its residential developments and has sold the bulk of its commercial properties to increase its cash flow. Since the second half of 2020, it has completed a secondary stock sale of $ 555 million, raising $ 1.8 billion by listing its property management unit in Hong Kong, while its EV unit has sold a stake of $ 3.4 billion to new investors.

It unveiled earlier this year its plan to split up three unlisted units – the online real estate and auto market Fangchebao, as well as theme parks and spring water businesses – in order to free up more capital. Fangchebao has already raised $ 2.1 billion in a pre-IPO in March.

On Tuesday, he said his plans to divest assets and shares to alleviate liquidity concerns had not made significant progress.

Does Evergrande present a risk?

China’s central bank noted in its 2018 financial stability report that companies, including Evergrande, could pose systemic risks to the country’s financial system.

Evergrande’s liabilities relate to more than 128 banks and more than 121 non-bank institutions, according to the letter Evergrande sent to the government late last year. JPMorgan estimated last week that China Minsheng Bank has the most exposure in Evergrande.

Late payments could trigger cross defaults, as many financial institutions are exposed to Evergrande through direct loans and indirect holdings through different financial instruments.

In the dollar bond market, Evergrande accounts for 4% of high Chinese real estate yields, according to DBS. Any default will also trigger massive sales in the high yield credit market. A collapse of Evergrande will have a significant impact on the labor market. It employs 200,000 people and hires 3.8 million people each year for project development.

What did the regulators say?

The People’s Bank of China and the China Banking and Insurance Regulatory Commission summoned Evergrande executives in August and warned that it must reduce its debt risks and prioritize stability.

Evergrande must “actively diffuse the risk of debt and maintain the stability of the real estate and financial markets,” they said in a joint statement, and “seriously implement the strategic measures taken by the central government to ensure stable development. and healthy real estate market, and strive to maintain the stability of operations “.

Media reports that regulators have approved a proposal by Evergrande to renegotiate payment terms with banks and other creditors. The Guangzhou government is also seeking advice from the main lenders in Evergrande on setting up a creditors committee.

Tags : real estate
Mary Cashion

The author Mary Cashion