How China Evergrande’s debt problems pose a global risk

Chinese group Evergrande missed an interest payment deadline on dollar bonds, approaching a potential default and fueling concerns about a collapse that could send shockwaves through the Chinese economy and beyond .

What is Evergrande?

President Hui Ka Yan founded Evergrande in Guangzhou in 1996. It is China’s second-largest real estate developer with $ 110 billion in sales last year, $ 355 billion (€ 302 billion) in assets and more of 1,300 developments across the country. It was listed in Hong Kong in 2009.

Evergrande has grown rapidly thanks to a wave of land purchases financed by loans and the sale of apartments quickly at low margins. It employs 200,000 people and employs 3.8 million per year for developments.

The slowdown in growth led it to branch out into businesses such as insurance, bottled water, soccer, and electric vehicles (EVs).

How did the concern arise about the debt?

In September last year, a leaked letter showed Evergrande pleading for government support to approve a now-abandoned backdoor listing. Sources told Reuters the letter was genuine; Evergrande called it fake.

In June, Evergrande said it failed to pay some trade bills on time, and in July, a court froze a $ 20 million bank deposit held by the company at the bank’s request.

The company said in late August that construction on some of its developments had halted due to missed payments to contractors and suppliers. Sources told Reuters he also missed payments on bank and trust loans in recent weeks.

Liabilities, including debts, total 1.97 trillion yuan (260 billion euros), or about 2% of China’s gross domestic product.

How has Evergrande reduced its debt?

Evergrande stepped up efforts to reduce debt last year after regulators introduced caps on three debt ratios, dubbed the “three red lines.” It aims to meet the requirements by 2022.

He offered deep discounts on residential developments to boost sales and sold the bulk of his commercial properties. Since the second half of 2020, it has sold a secondary stock sale of $ 555 million, raised $ 1.8 billion by listing its property management unit and saw its EV unit sell a stake of 3.4 billions of dollars.

On September 14, he said that plans for the disposal of assets and shares had not made significant progress.

What is the risk?

The central bank said in 2018 that companies, including Evergrande, could pose a systemic risk to China’s financial system.

The company’s liabilities involved as many as 128 banks and more than 121 non-bank institutions, according to the leaked letter.

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

In the US dollar bond market, Evergrande accounts for 4% of China’s high yield real estate debt, according to data from Singapore bank DBS. A default could further trigger a sell off in high yield credit markets.

What about operations outside of mainland China?

Business

Evergrande’s domestic debt deal eases cont …

In Hong Kong, Evergrande has an office tower and residential development as well as two near-completed residential developments, as well as a large undeveloped lot.

It has spent billions of dollars to acquire stakes in automotive technology developers, including Sweden’s NEVS, Dutch e-Traction and Britain’s Protean. It also has joint ventures with the German Hofer and the Swedish Koenigsegg.

What did the regulators say?

The central bank and the banking regulator in August ordered Evergrande to reduce the risk of indebtedness.

Regulators have approved an Evergrande proposal to renegotiate payment terms with banks and other creditors, media reported. The Guangzhou government is also seeking advice from major lenders on the establishment of a creditors committee.

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