Home Enterprise bank Analysis: China’s house of cards: Evergrande threatens wider real estate market

Analysis: China’s house of cards: Evergrande threatens wider real estate market


The China Evergrande Center is seen in Hong Kong, China. August 25, 2021. REUTERS / Tyrone Siu / File Photo

SINGAPORE / SHANGHAI, Sept. 14 (Reuters) – China Evergrande swings between a messy collapse with far-reaching impacts, a managed collapse, or the less likely prospect of a Beijing bailout for what was once the best-selling real estate developer in the world. country.

Founded in Guangzhou in 1996, Evergrande epitomized China’s freewheeling borrowing and construction era, but with liabilities of nearly two trillion yuan ($ 305 billion) its possible collapse looms as one of the most important in China for years.

Debt and land purchase restrictions and hundreds of new rules have been imposed on Chinese developers in recent years as part of a campaign to reduce financial risks and promote affordable housing.

Evergrande (3333.HK), which ramped up efforts to reduce debt in 2020 after regulators introduced caps, has no significant offshore bond maturities until early next year, but late payment vendors and interest on loans skyrocketed concerns that have long plagued investors.

Now, without access to new funding, Evergrande cannot pay suppliers, complete projects or increase revenue, prompting it to hire advisors and warn of the risk of default. This, along with a buyout, break-up or bailout, are the scenarios currently being assessed.

And while analysts have played down comparisons to the 2008 collapse of US investment bank Lehman Brothers, which caused crises among counterparties and ultimately seized global markets, some investors have similar contagion concerns.

“If as expected Evergrande defaults on its debt and undergoes a restructuring, I don’t see why it would be contained,” said Michel Lowy of banking and asset management firm SC Lowy, which focuses on troubled debt. and high yield, said.

“There are other developers who are suffering from the same problem of lack of access to cash and have spread too far,” Lowy added.

Other concerns include the exposure of banks and the determination of regulators to pursue real estate market reforms despite suspicion of damaging consequences.

The reaction so far has focused on the bond market and Evergrande stocks, as well as stocks and bonds from other developers such as, among others, Guangzhou R&F Properties Co (2777.HK) and Xinyuan Real Estate Co (XIN.N).

Evergrande shares have fallen about 90% in 14 months, while its dollar bonds are trading 60-70% below par.

“Stress is mounting for the most obvious gray rhino in China, namely the real estate sector,” said Alicia Garcia Herrero, Natixis economist.


The most immediate concern is a real estate crash rather than a Lehman-style financial crisis. A fire sale to Evergrande could crush prices, blasting leveraged developers and crippling a sector making up a quarter of China’s economy.

“Lehman (was) very different when he walked through the financial system, freezing activity,” said Patrick Perret-Green, an independent analyst based in London.

“Millions of contracts with multiple counterparties, everyone was trying to determine their exposure,” he said. “With Evergrande, it depresses the whole real estate industry.”

The banks’ exposure is also wide, and a leaked 2020 document, seen as a fabrication by Evergrande but taken seriously by analysts, showed liabilities stretching to more than 128 banks and more than 121 non-bank institutions.

But data suggests nonperforming commercial bank loans were manageable at 1.76% last quarter, and compared to the United States, China has much more control over its financial system.

The authorities ‘willingness to reduce developers’ debts is also seen as increasing the likelihood of a real estate liquidation.

“The government has worked tirelessly to reduce leverage in the bloated real estate sector, so it’s unlikely to throw a lifeline in Evergrande,” said James Shi, struggling debt analyst at the analytics provider. Reorg Credit.

Analysts are increasingly expecting a managed collapse that aims to protect small investors, with around 100 angry people showing up at Evergrande headquarters on Tuesday, while bondholders get their hair cut.

“We don’t think there is any incentive for the government to bail out Evergrande (which is a private company),” Iris Chen, analyst at Nomura, said in a note to clients.

“But they also won’t push Evergrande down and oversee a more orderly default, if at all, in our opinion.”

If Evergrande is to get anything back, he has to find buyers for his assets first, which he struggles to do as potential saviors seem content to wait for more distress.

In a stock market announcement Tuesday, Evergrande said it had not been able to complete the divestiture of its office building in Hong Kong “on schedule.”

“The negative media reports about the group have shaken the confidence of potential buyers,” Evergrande added.

Reporting by Tom Westbrook in Singapore and Andrew Galbraith in Shanghai; Additional reporting by Vidya Ranganathan in Singapore and Samuel Shen in Shanghai; Editing by Alexander Smith

Our standards: Thomson Reuters Trust Principles.

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