China property market rocked as giant Evergrande
struggles to repay $300bn debts
Shares in Hong Kong-listed firm slump 10% and bond
trade suspended amid fears of contagion in shaky Chinese real estate market
Martin
Farrer and agencies
Thu 9 Sep
2021 06.48 BST
Shares in
the embattled Chinese property giant Evergrande have slumped again after two credit
downgrades in two days amid concerns that it will default on parts of its
massive $300bn debt pile.
Evergrande,
which is one of the world’s most indebted companies, has seen its shares tumble
75% this year. They fell by almost 10% on Thursday morning to HK$3.35, which is
below the listing price when the company floated on the Hong Kong market in
2009.
Trading in
one of the company’s bonds was suspended by the Shenzhen stock exchange on
Thursday morning after the price plunged 20%.
The online
market trading platform IG said Evergrande posed “a risk of contagion” after
Bloomberg reported that Credit Suisse and Citibank were no longer accepting the
bonds of another highly indebted Chinese property developer, Fantasia, as
collateral.
There were
also reports from China on Wednesday of employees protesting outside the
company’s offices about salaries not being paid. Evergrande claims to employ
200,000 people and indirectly generate 3.8 million jobs in China.
The company
has run up a mountain of liabilities totalling more than $300bn after years of
borrowing to fund rapid growth and a string of real estate acquisitions as well
as other assets including a Chinese football team.
But the
firm has struggled to service its debts and a crackdown on the property sector
by Beijing has made it even harder to raise cash, fuelling concerns it will go
bankrupt.
The value
of new home sales has fallen 20% in China since the peak in the first three
months of this year, and the value of land sales are also sharply down. Along
with Beijing’s tougher regulation, these factors have made it much harder for
Evergrande to dispose of unsold properties even with huge discounts.
Investors
questioned how Evergrande was going to dispose of assets in order to repay debts
without a clear plan.
“There is a
lack of confidence and lots of rumors, the key is that we still don’t see a
clear [debt resolution] plan,” a stock exchange trader told Reuters.
On Tuesday,
a stock exchange filing showed that Evergrande had outstanding liabilities
worth 562m yuan ($87m) to a supplier called Skshu Paint and repaid some of the
money in the form of apartments in three unfinished property projects.
Xi Jinping,
China’s president, has targeted “unsustainable” economic growth in recent
months, along with his drive against the country’s increasingly powerful tech
billionaires.
But whether
he would allow Evergrande to go bust if it fails to meet key repayment
deadlines on 21 September remains unclear.
Many
analysts warn such an event could have a serious impact on the world’s number
two economy because the firm would go under, leaving hundreds of firms out of
pocket.
Those
worries were increased on Wednesday when Fitch cut its rating on Evergrande to
CC, reflecting its view that “a default of some kind appears probable”.
“We believe
credit risk is high given tight liquidity, declining contracted sales, pressure
to address delayed payments to suppliers and contractors, and limited progress
on asset disposals,” said a Fitch Ratings statement.
The move
came a day after Moody’s slashed its rating, indicating it is “likely in, or
very near, default”, while Goldman Sachs has cut the stock from neutral to
sell.
Last week,
the group said its total liabilities had swelled to 1.97tn yuan ($305bn) and
warned of risks of defaults on borrowings.
It issued a
profit warning at the end of August in which it admitted that it could default
on debt payments. The warning came days after Xu Jiayin, the billionaire
founder of Evergrande Group and the third richest person in China, resigned as
chairman of its real estate arm.
In the
latest indication of the company’s funding challenges, financial information
provider REDD reported on Wednesday that the company would suspend interest
payments due on loans to two banks on 21 September.
James
Laurenceson, director of the Australia-China Relations Institute, said
Evergrande could be forced into a fire sale but cautioned that the sheer size
of the business meant that the situation might not be as dire as some imagined.
“It’s
always important when talking about debts to remember that the company also has
assets. When you compare the two, the scale of the risk and the possibility of
things spinning out of control are moderated.
“I’d be
surprised if Xi allows a full-scale bailout, but you have to see it in the
context of a $14tn economy.”
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