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Evergrande’s downfall in China has systemic risk. Its debts are 2% of Chinese GDP and it owes money to 128 banks

Chinese group Evergrande has released new warnings about default risks amid delays in payments on trust and wealth management products.

The real estate giant has been struggling to get the funds it needs to pay its lenders and suppliers, and regulators and financial markets are concerned that any crisis could spread through the Chinese banking system and trigger broader social unrest.

WHO IS EVERGRANDE?

Founded in 1996 by President Hui Ka Yan in the southern city of Guangzhou, Evergrande accelerated its growth in the past decade to become China’s second-largest real estate developer, with $ 110 billion in sales last year.

The company was listed in Hong Kong in 2009, giving it more access to the capital and debt markets to increase the size of its assets to $ 355 billion today. It has more than 1,300 promotions nationwide, many of them in lower-tier cities.

With domestic sales growth slowing in recent years, Evergrande has also branched out into non-real estate businesses such as electric cars, soccer, insurance, and bottled water.

HOW DID THE CONCERN ABOUT THE ACCUMULATION OF DEBT ARISE?

Investors became concerned after a leaked letter in September showed that Evergrande had requested government support to approve an already scrapped IPO plan, warning that it was facing a liquidity crisis.

Concerns intensified after Evergrande admitted in June that it had not paid some commercial papers on time, and in July a Chinese court frozen a $ 20 million bank deposit held by the company at the request of Guangfa Bank.

Evergrande’s rapid expansion over the years has been driven by debt. He has aggressively borrowed to support his land-buying career, and has sold apartments quickly despite low margins to start the cycle all over again.

According to the company’s interim report, its interest-bearing debt stood at 571.8 billion yuan ($ 89 billion) at the end of June, up from 716.5 billion at the end of 2020, as it has stepped up its deleveraging efforts.

However, total liabilities, which include accounts payable, rose slightly to 1.97 trillion yuan, which is about 2% of the country’s GDP.

In addition to the usual banking and bond channels, the developer has been criticized for turning to the less regulated shadow banking market, which includes trusts, wealth management products and commercial paper.

WHAT HAS EVERGRANDE DONE TO UNLEVER?

Evergrande accelerated its efforts to reduce its debt last year after regulators introduced limits on three debt ratios, known as “the three red lines.” You have said that you aim to meet all the requirements by the end of next year.

Evergrande has offered buyers deep discounts on its residential developments and sold most of its commercial properties to increase cash flow. Since the second half of 2020, it has made a secondary sale of shares worth $ 555 million and raised $ 1.8 billion by listing its property management unit in Hong Kong, while its EV unit sold a stake of 3.4 billion. dollars to new investors.

Earlier this year it revealed its plans to spin off three unlisted units – the online car and real estate market Fangchebao, and the theme park and spring water businesses – to free up more capital. Fangchebao already raised $ 2.1 billion in a pre-IPO in March.

On Tuesday, it said its plans to sell assets and stocks to ease liquidity problems have not made significant progress.

IS EVER LARGE A RISK?

China’s central bank highlighted in its 2018 financial stability report that companies like Evergrande could pose systemic risks to the country’s financial system.

Evergrande’s liabilities involve more than 128 banks and more than 121 non-bank institutions, according to the letter Evergrande sent to the government late last year. JPMorgan estimated last week that China Minsheng Bank has the highest exposure to Evergrande.

Late payments could trigger cross defaults, as many financial institutions are exposed to Evergrande through direct loans and indirect participations through different financial instruments.

In the dollar bond market, Evergrande accounts for 4% of China’s high real estate returns, according to DBS. Any defaults will also trigger sales in the high yield credit market. An Evergrande collapse will have a huge impact on the job market. It has 200,000 employees and hires 3.8 million people each year to develop projects.

WHAT HAVE THE REGULATORS SAID?

The People’s Bank of China and the China Banking and Insurance Regulatory Commission convened Evergrande executives in August and warned them that it should reduce its debt risks and prioritize stability.

Evergrande must “actively dissipate the risk of indebtedness and maintain the stability of the real estate and financial markets,” they said in a joint statement, and “seriously apply the strategic provisions adopted by the central government to ensure the stable and healthy development of the real estate market. , and strive to maintain the stability of operations ”.

The media claim that regulators have approved an Evergrande proposal to renegotiate payment terms with banks and other creditors. The Guangzhou government is also seeking input from Evergrande’s top lenders on setting up a committee of creditors. ($ 1 = 6.4427 Chinese yuan) (Edited by Sumeet Chatterjee and Jacqueline Wong) .. Translate serenitymarkets

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