The Emerald Bay residential project developed by China Evergrande in the Tuen Mun area of the New Territories in Hong Kong, China, Friday, July 23, 2021.
Lam Yik | Bloomberg | Getty Images
Chinese real estate giant Evergrande On the verge of collapse, analysts warn that the potential fallout could have far-reaching effects that extend beyond China’s borders.
“The Evergrande crash will be the biggest test the Chinese financial system has faced in years,” says Mark Williams, chief Asia economist at Capital Economics.
Here’s how bad its problems are, and what investors have in store for it.
After rapidly expanding for years and grabbing assets as the Chinese economy boomed, Evergrande is now mired in crushing $300 billion in debt.
The world’s most indebted real estate developer is seeking to pay its suppliers, and has warned investors twice in as many weeks that it could default on its debts.
On Tuesday, Evergrande said its real estate sales will likely continue to decline significantly in September after dropping for several months, Which makes the cash flow situation even more dangerous.
The Chinese developer is so huge that the repercussions of a potential failure could not only harm the Chinese economy, but also spread to markets outside it.
Banks have also responded to the deterioration of their cash flows. some in hong kong, Including HSBC and Standard Chartered, has refused to provide new loans to buyers of two unfinished housing projects in Evergrande, Reuters reported.
Rating agencies have repeatedly downgraded the company, citing its liquidity problems. Evergrande’s problems worsened last year when China introduced rules to curb borrowing costs for developers. These measures set a debt ceiling in relation to the company’s cash flows, assets and capital levels.
Its share price is down about 80% so far this year, and Chinese stock exchanges have repeatedly stopped trading its bonds in the past weeks.
Evergrande is everywhere. Its main activity is real estate, and it is the second largest real estate developer in China in terms of sales.
- Evergrande has more than 1,300 real estate projects in more than 280 cities in China.
- The property services management arm is involved in nearly 2,800 projects in more than 310 cities in China.
- The company has seven units that operate in a wide range of industries, including electric vehicles, healthcare services, consumer products, video and television production units, and even amusement park.
- The company says it has 200,000 employees, but indirectly creates more than 3.8 million jobs each year, according to its website.
- Evergrande stocks and bonds are included in indices across Asia.
The group of affected parties includes banks, suppliers, home buyers and investors.
Evergrande warned this week that his escalating problems could lead to greater risk of default.
If she can’t pay her debts, she said, it could lead to a situation of “cross-default” — where defaults in one instance could spread to other obligations, spreading contagion.
Williams of Capital Economics said the banking industry would be among the first to be affected if there were any effects of the contagion on China’s broader real estate sector.
“A bank failure caused by the collapse of major property developers was the single most likely scenario that could lead to a hard landing in China. The fact that financial markets are currently not so alarming does not mean that they will not.” Williams wrote in a note last week.
2. Home Buyers and Investors
Angry homebuyer and investor protests have erupted in recent days in some cities, and social unrest has been among the concerns.
on Monday, About 100 investors attended At Evergrande’s Shenzhen headquarters, they are demanding repayment of loans on overdue financial products — setting chaotic scenes, according to Reuters.
Indeed, sentiment is already spreading to Asia’s high-yield bonds. Yields on Asian offshore bonds, which are dominated by real estate companies, rose to 13% on average, according to TS Lombard.
This also means that overseas investors are on the losing end, the research firm said in a note last week.
“The company’s guarantee of delivery of all previously sold projects will likely result in overseas stakeholders seeing little, if any, of the eventual sale of developer assets in the event of a bailout,” said TS Lombard.
“Hence the possibility of an asymmetric swap, in which the interests of internal lenders – households and banks – are protected at the expense of shares and bondholders abroad,” the note read.
It can also resonate in other industries if suppliers are not paid. According to S&P Global ratings, Evergrande may be trying to “convince” its suppliers and contractors to accept physical property as payment — in an effort to conserve cash to pay off loans.
In a report released in August, S&P estimated that over the next 12 months, Evergrande will have more than 240 billion yuan ($37.16 billion) in invoices and trade payables from contractors to settle — about 100 billion yuan of that amount due this year.
A supplier of paints for Evergrande, Shanghai-listed Skshu Paint, said in a filing that the real estate company had paid off part of its property debt — and uncompleted debt at the time.
Ratings agency Fitch said banks could also have indirect exposure to Evergrande suppliers — the developer’s trade creditors amounted to CNY667 billion, according to a Fitch analysis.
The government is more likely to step in given how important Evergrande is, according to analysts.
“Evergrand is an important real estate developer, and it would be a strong signal if anything were to happen to it,” said Dan Wang, economist at Hang Seng Bank. “I think there will be some supportive action from the central government, or even the central bank, in an effort to save the Evergrande.”
But restructuring may be more likely, according to other analysts.
“The most likely end game right now is a managed restructuring in which other developers take over unfinished Evergrande projects in exchange for a stake in its land bank,” Williams of Capital Economics said in a note last week.
He said the government is likely to give priority to homebuyers and banks over other parties.
“The main priority for policy makers will be households that have handed over unexpired real estate deposits. The company’s other creditors will suffer,” Williams wrote.
Investment bank Natixis said the Chinese government will avoid “systemic risks” in the run-up to the 2022 National Congress of the Communist Party of China, given its historical significance.
“However, this also means that China’s Evergrande debt crisis may multiply down the road,” the bank said in a note, adding that economic growth would not mitigate financial losses as in the past.