Evergrande on shaky ground
The Chinese property developer has overexpanded and overborrowed, and is now close to bankruptcy. Will Beijing bail it out? Matthew Partridge reports
The Chinese property conglomerate Evergrande “teeters on the edge of collapse”, threatening to “send shockwaves” through China’s property and banking sectors by defaulting on some of its $300bn in liabilities, say Didi Tang and
Tom Howard in The Times. Founded in 1996, Evergrande claims “to have built homes for more than 12 million people”.
However, rapid expansion, including into other areas such as “football and electric vehicles”, has turned it into “the world’s most-indebted housebuilder”. This debt has caused it to come unstuck “amid disputes with its contractors, pressure from lenders and the suspension of work at some of its developments”. The share price has slumped by 85% this year.
Evergande’s finances seem to have been in a mess for some time, says the Financial Times. It allegedly used billions raised by selling high-risk wealth-management products to retail investors “to plug funding gaps and even to pay back other wealth-management investors”. With retail investors now wanting their money back, and lenders unwilling to advance any more money, the company is promising investors flats or parking spots instead of giving them back their cash.
Reading the runes
With Evergrande “struggling to meet the interest payments on its debts”, its best hope seems to that Beijing, spooked by the “very serious potential fallout of such a heavily-indebted company collapsing”, decides to “step in to rescue it” says Peter Hoskins and Katie Silver on the BBC.
However, Evergrande should not automatically assume that any request for direct aid will be granted. In an indication of Beijing’s current thinking, the editor-in-chief of state-backed Global Times newspaper, Hu Xijin, has publicly said Evergrande “should not rely on a government bailout and instead needs to save itself”. No wonder the government is denying that it is going to bail out Evergrande, says John Authers on
Bloomberg, especially since it has been trying to “clamp down on property developers”. But Beijing also plainly intends this to be “more LTCM than Lehman”. Regulators have already “dispatched accounting and legal experts, including a team from restructuring speciality law firm King & Wood Mallesons”. All this suggests that Beijing “could be laying the groundwork for a restructuring of Evergrande and its debt”.
It’s true that an Evergrande bankruptcy could lead to a “painful” correction in the local realestate sector, with implications for every company that invests in or exports things to China, says Peter Sweeney for Breakingviews. However, even if it goes bust, the direct implications for Western banks and financial institutions will be limited, as Evergrande’s biggest lenders “are domestic banks like China Minsheng Banking and Agricultural Bank of China”. The upshot? Some foreign trading desks “will take a hit” while investment bankers who sold the developer’s bonds to clients “may have uncomfortable conversations with lawyers coming up”.