Bigger than any other developer in China’s cornerstone real estate market – and saddled with more debt – officials have swooped on China Evergrande to fix its financial problems, lest they weigh on the banking system and broader economy.
The privately owned Guangdong-based company has said it will do everything it can to resolve its debt issues a day after receiving a rare warning from concerned regulators to get its house in order. In the rebuke, officials from People’s Bank of China and the China Banking and Insurance Regulatory Commission also warned the company to stop spreading misleading information.
The move comes days after China provided a bailout for another lynchpin part of the economy, the state-owned bad-debt manager China Huarong Asset Management.
Financial markets are worried that any crisis at Evergrande or Huarong could ripple through China’s banking system as they struggle to find the cash needed to pay their many lenders and suppliers. Analysts had warned that if Huarong collapsed it could spark a “Lehman moment” in China and lead to a systemic failure in the planned economy.
Maintain Stability
Evergrande, in a statement issued hours after regulators summoned company executives, said it would work to maintain the stability of the real estate market.
The unusual summons came days after President Xi Jinping highlighted efforts to forestall major financial risks and as a flurry of regulatory crackdowns roil China’s equity markets.
“Evergrande Group will fully implement the requirements of the interview and unswervingly implement the central government’s strategic deployment of the stable and healthy development of the real estate market,” the developer said in the statement.
Despite Evergrande’s sale of a number of assets recently and bond repayments, analysts said the summons shows that the regulators are not satisfied with the company’s progress in resolving its debt problems so far.
Some analysts estimate its total debt at more than $300 billion.
“This (is) a strong warning to the company and (we) expect an acceleration in asset sales, introducing strategic investors, and advancing negotiations with suppliers,” Lucror Analytics credit analyst Chuanyi Zhou said.
Shares Drop
But investors appeared divided over its prospects.
Evergrande’s Hong Kong-listed shares reversed early gains to drop 2% by noon, taking their tumble so far this year to more than 75%.
Its yuan bonds due in July 2022 rose 6.4%, but bonds maturing in May 2023 lost 8.6%, suggesting investors were more optimistic about repayments of its short-term debt than longer-term obligations. Respectively, the bonds were the biggest gainers and losers in Shanghai.
Wei Liang Chang, a strategist at Singapore’s DBS Bank, said the summons should assure markets that policymakers will not be slow to respond to risks, though he added it might be too early to draw too many conclusions.
“While Huarong was granted a state-led recapitalisation, there is no equivalent policy relief for Evergrande,” he said.
EV Sale
Evergrande, which had $88 billion of interest-bearing indebtedness at the end of June, has been pursuing asset sales, including plans to offload part of its electric vehicle business.
Evergrande said in a statement on Friday that its unit, Evergrande New Energy Vehicle (NEV) Group, had held preliminary talks with smartphone maker Xiaomi regarding it coming on as a strategic shareholder, although there was no in-depth discussion.
Evergrande also has more than 240 billion yuan (nearly $37 billion) of bills and trade payables from contractors to settle over the next 12 months, according to ratings agency S&P Global.
Concern over the developer’s financial health intensified in June when it failed to pay some commercial paper on time. It has faced a growing number of legal claims over late payments.
- Reuters, Mark McCord
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