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Explainer-How China Evergrande’s debt troubles pose a systemic risk -Breaking

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© Reuters. The logo of China Evergrande Group is seen in Shanghai, China on September 22nd 2021. A Chinese flag can be seen flying in front of the Evergrande Center. REUTERS/Aly Song

By Clare Jim

HONG KONG (Reuters – China Evergrande Group supplied funds for interest payments on a dollar bonds, a person who has direct knowledge told Reuters. The disclosure was made on Friday by a person familiar with the matter, just days before a deadline, which could have led to the developer falling into formal default.

The news about the remittance will probably bring relief for investors and regulators concerned about global market fallout from a default. It will also provide reassurance to Chinese officials, who stated that creditors would be safe.

WHAT IS EVERGRANDE?

Evergrande, founded by Hui Ka Yan at Guangzhou, was established in 1996. China’s second largest property developer is Evergrande, which has $110 billion in annual sales, $355 billion assets, and over 1,300 development sites. It was listed in Hong Kong on September 9, 2009.

Evergrande experienced rapid growth through loan-supported land purchases and the sale of apartments at low margins. The interim report indicated that it employed 163,119 people as of June end.

It has expanded into other businesses like insurance, bottled waters, and electric cars (EVs) due to its slow growth.

HOW COME CONCERNS ARISED ABOUT DEBT?

Evergrande wrote a letter in September asking for support from the government to allow a backdoor listing on stock markets. Sources confirmed to Reuters that the letter was genuine, but Evergrande claimed it was fake.

Evergrande stated that in June it had not paid commercial paper by due date. A court also frozen the $20 million bank account Evergrande held at the request of the bank.

In late August, Evergrande stated construction was stalled at several of its developments because it had not paid suppliers or contractors. Sources told Reuters that the firm sought a repayment extension for a trust-loan in September. Media reports claimed Evergrande would stop paying interest on two loans it had taken out.

End-June, Liabilities including Payables totalled 1.97 trillion Yuan (or $306 billion). That’s equivalent to about 2% of China’s Gross Domestic Product.

WHAT HAS EVERGRANDE DONE TO REDUCED DEBT?

Evergrande intensified its debt reduction efforts last year, after regulators set limits to three debt ratios. These were known as “three red lines”. These requirements are being met by Evergrande until 2022.

In order to increase sales it gave steep discounts for residential developments and sold the majority of its commercial properties. It has sold $555 million in secondary shares and raised $1.8billion by selling its property management business. The EV division was worth $3.4billion.

The company announced that it had not made material progress in asset and equity sale plans on Sept. 14.

WHAT IS THE RISK

China’s central bank stated in 2018 that Evergrande and other companies could pose a systemic threat to China’s financial systems.

Leaked letters revealed that the firm had liabilities with over 128 banks as well as 121 other non-banking institutions.

Due to the fact that many financial institutions have direct and indirect loans, late payments could lead to cross-defaults.

OPERATIONS OUTSIDE MAINLAND CHINA

Evergrande is a Hong Kong-based developer that owns an office building and residential tower. There are also two residential developments in the works, as well as two residential projects almost completed, as well as a huge undeveloped area.

The company has invested billions of dollars in acquiring shares in technology companies, such as the NEVS (Sweden), e-Traction (Netherlands), and Protean (Britain). Additionally, it has joint ventures in Germany with Hofer and Sweden with Koenigsegg.

WHAT DO REGULATORS STAY ABOUT EVERGRANDE AND PROPERTY?

Yi Huiman is the chairman of China’s securities regulator. He stated that the authorities would correctly handle default risks, and will look for ways to limit excessive debt.

Yi Gang, central bank governor, said Sunday that the world’s second most populous economy was doing “well” but faced challenges due to mismanagement.

Yi claimed that China will respect Evergrande’s rights as creditors and owners of assets, according to “repayment priorities”, set out in China’s laws.

WHAT’S THE NEXT STEP FOR EVERGRANDE

According to Reuters sources, Evergrande deposited $83.5 million on Thursday to a Citibank trustee account. This allowed it to pay bondholders prior to the Saturday payment grace period.

It will still need to make payments to a number of bonds. The next deadline to avoid default is only one week away. Little information about the developer’s financial situation makes it difficult to know if the company can pay these debts.

Evergrande failed to pay coupon payments of nearly $280,000,000 on its dollar bonds, Sept. 23, Sept. 29, and Oct. 11. These coupons were due within 30-day grace periods.

Non-payment will result in formal default after a grace period expires. This would also trigger cross-default provisions on its dollar bonds. Evergrande’s next payment due date is October 29, after the expiration the 30-day grace period for its September 29 coupon.

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