Evergrande Real Estate Group updates
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Just a year away from an unprecedented third term in power, Xi Jinping is taking one of the biggest economic gambles of his presidency by letting Evergrande teeter on the edge of bankruptcy.
A collapse of the heavily indebted Chinese developer would have grave consequences for hundreds of thousands of property buyers and retail investors, as well as financial stability and economic growth in the world’s second-largest economy.
Yet Xi’s administration has yet to offer any reassurances that it will intervene to stabilise the situation, as it recently did with two other large conglomerates that almost collapsed under the weight of their significant debts.
“Senior officials are very concerned about Evergrande,” said one government adviser, who noted that China’s debt-to-gross domestic product ratio had surged from 250 to 290 per cent in under two years.
“But it is only the tip of the iceberg,” he added. “If something really dramatic happens to Evergrande, the risk premium for other developers’ debt will be much higher, creating another drag for the sector.”
After sharp falls in Hong Kong early this week, Chinese markets were relatively stable on Wednesday as Evergrande said it would make an onshore bond payment due on Thursday. But the private-sector developer, founded and led by billionaire Hui Ka Yan, gave no such reassurance about an offshore bond payment also due on Thursday.
Beijing has overseen a plethora of state-led restructurings of debt-laden groups over recent weeks including Huarong, the state-owned asset manager, and HNA, an aviation, logistics and tourism conglomerate. Evergrande, however, stands out because of its direct impact on the lives of millions of people across the country.
In addition to the estimated $300bn Evergrande owes banks, bondholders and suppliers, the group has issued more than $6bn in high-yield wealth management products to an estimated 80,000 retail investors, including its own employees, who protested last week at its headquarters in the southern city of Shenzhen. Homebuyers have pre-paid Evergrande for an estimated 1.6m flats that it has not delivered.
“This is going to be different because of the additional pressures that will come from ordinary citizens,” said David Yu, a finance industry expert at NYU Shanghai.
The group is, by sales, the second-largest developer in the property industry that accounts for more than a quarter of Chinese economic output. But as loath as Xi’s administration is to allow such a critical economic engine to fail, it is also worried about the very expensive precedent it would set by organising a state-led bailout.
“Many developers are under stress because of policy tightening,” said one person familiar with the group’s discussions with Chinese financial regulators.
“If the government steps in to help Evergrande, all the other major developers will make similar requests. There is no way the government can save them all.”
If Xi and his economic team do decide that the state must intervene at Evergrande to prevent a much larger market and economic meltdown, one important political challenge will be how to save the group without necessarily saving Hui, its founding chair.
Last month Xi launched a domestic policy agenda that would focus on “common prosperity” and is a central plank in his bid for an unprecedented third term, starting at the end of 2022, as head of the Chinese Communist party. Rescuing Hui, China’s fifth-richest man, does not fit with Xi’s vision of a more equitable society.
Hui controls more than 70 per cent of Evergrande. The Hurun Report estimated his fortune to be worth $35bn at the end of 2020. While Hui’s net worth will take a big hit after an 86 per cent fall in the group’s share price over the past 12 months, he has reaped billions of dollars in dividends over recent years.
“A wholesale bailout is not likely,” predicted Larry Hu, chief China economist at Macquarie. “Shareholders and lenders might take a big loss. But the government will make sure that pre-sold apartments get delivered to homebuyers.”
The government adviser said that Beijing’s approach with HNA, which had debts of more than $75bn, offered one potential model for how to handle Evergrande.
HNA’s chair was sidelined by a government appointee who then reorganised the conglomerate into four distinct units and found a state-owned white knight investor for its best-known asset, Hainan Airlines.
“The company would survive but they would push out management,” the adviser said. “That’s what happened with HNA. It stabilised the company, its share prices and bond prices. Officials have a lot of confidence in this approach.”
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