Explainer-How China Evergrande’s debt troubles pose a systemic risk By Reuters
By Clare Jim
HONG KONG (Reuters) – China Evergrande Group has raised fresh warnings of default risks, as it scrambles to raise funds to pay lenders and suppliers with regulators and financial markets worried that any crisis could ripple through China’s banking system and trigger social unrest.
WHAT IS EVERGRANDE?
Evergrande was founded in Guangzhou in 1996 by Chairman Hui Ka Yan. It is China’s number two property developer, with sales of $110 billion last year.
In 2009, the company was listed in Hong Kong. This allowed it to grow its portfolio to $355 Billion today. There are more than 1300 development sites across the country, some in small towns.
Evergrande expanded into other businesses, such as football, insurance, and bottled water, after sales growth slowed in recent years.
WHAT CAUSED CONCERNS ABOUT DEBT?
In September 2011, investors were worried after Evergrande, a letter purportedly from Evergrande, pleaded with the government for approval of a no-longer viable backdoor listing plan. Evergrande claimed the letter was fake.
Evergrande said the letter was fake after it admitted that in June it didn’t pay commercial paper on schedule. Then, in July, a Chinese court ordered Guangfa to freeze a $20 million Chinese bank account Evergrande had held.
Evergrande has grown rapidly thanks to loans that have been used to finance its land-buying spree. It also sells apartments fast despite having low margins to restart the cycle.
The country’s total liabilities, including payables, are at 1.97 trillion Yuan (306.3 billion), which is around 2%.
The developer was also criticised for taping the shadow banking market. This includes trusts and wealth management products.
WHAT HAS EVERGRANDE DELIVERED?
Evergrande has increased its debt reduction efforts after the introduction of three limits on debt levels by regulators. These were known as “three redlines” policies. By 2022, it aims at meeting all of the requirements.
Evergrande offered buyers steep discounts on its residential development and has sold most of its commercial property. It has sold $555 million in secondary shares since the second quarter of 2020. This includes $1.8 billion through the listing of its Hong Kong property management unit, and $3.4 billion from its EV unit to new investors.
However, the company said Tuesday that its equity and asset disposal plans had not made any material progress.
WHAT IS THE RISK
China’s central banking highlighted that Evergrande could pose systemic risk to its financial system in 2018.
According to a leaked letter, Evergrande’s liabilities include more than 128 banks as well as over 121 institutions that are not banking. JPMorgan (NYSE 🙂 last week estimated that China Minsheng Bank is the most exposed to Evergrande.
Cross-defaults could be triggered by late payments, as several financial institutions are exposed to Evergrande through direct loans or indirect holdings using different financial instruments.
According to DBS, Evergrande is responsible for 4 percent of Chinese high-yield real estate bonds. Any defaults could also lead to sell-offs of high-yield debt markets.
Evergrande’s failure will cause a significant impact on the employment market. It employs over 200,000 workers and 3.8 millions people annually for projects development.
WHAT ABOUT OPERATIONS OUTSIDE MAINLAND CHINA
Evergrande has an office tower located in Hong Kong’s Wan Chai area. There are two residential projects in Hong Kong that have been completed or near completion, as well as a large undeveloped area.
Evergrande, which is not located in Greater China, has invested billions of dollars to buy stakes into foreign auto technologies. These include the Swedish NEVS, Dutch e-Traction, and British Protean.
The company also formed a JV with Germany’s Hofer AG. This is an automotive powertrain systems developer and supercar maker Koenigsegg.
What HAVE REGULATORS MENTIONED?
Evergrande was warned by the People’s Bank of China and China Banking and Insurance Regulatory Commission in August about its need to lower its debt risk.
According to media reports, regulators approved Evergrande’s proposal to extend payment terms with banks and creditors. Guangzhou’s government also wants to hear from Evergrande’s top lenders on the idea of forming a creditor board.