Beijing (AP) — A Chinese developer suffering from debt of less than $ 310 billion warned on Friday that it could run out of funds to “fulfill its financial obligations”.
The Evergrande Group’s struggle to comply with official pressure to reduce debt has fueled concerns that the possibility of default could lead to a financial crisis. Economists say the global market is unlikely to be affected, but banks and bondholders may suffer as Beijing wants to avoid bailouts.
After reviewing Evergrande’s finances, the company said in a statement through the Hong Kong Stock Exchange that “there is no guarantee that the Group has sufficient funds to continue to fulfill its financial obligations.”
Shortly thereafter, regulators sought to ease investor anxiety by issuing a statement that China’s financial system was strong and default rates were low. They said most developers are financially sound and Beijing will continue to keep the lending market functioning.
“The spillover effects of group risk events on the stable operation of capital markets are controllable,” the China Securities Regulatory Commission said on its website. Central banks and bank regulators have issued similar statements.
Last year, Beijing tightened restrictions on developers’ use of borrowing in a campaign to curb the surge in corporate debt, which is seen as threatening economic stability.
Since 2018, the ruling Communist Party has prioritized mitigating financial risk. In 2014, authorities allowed the first corporate bond defaults since the 1949 Communist Revolution. Defaults have been allowed to increase gradually, hoping to enforce more discipline on borrowers and investors.
Nonetheless, total corporate, government and household debt increased from 270% of annual economic output in 2018 to nearly 300% last year, making it unusually high for a middle-income country. became. Economists say debt is unlikely to cause a financial crisis, but debt can drag economic growth.
Evergrande, the world’s largest debtor in the real estate industry, owes 2 trillion yuan ($ 310 billion) mainly to domestic banks and fixed income investors. It also owes $ 19 billion to foreign bondholders.
Evergrande said it has assets of 2.3 trillion yuan ($ 350 billion), but the company is struggling to turn it into cash to pay bondholders and other creditors. Last October, the buyer stopped selling $ 2.6 billion of its subsidiary’s stock because it couldn’t follow the purchase.
According to Evergrande’s Friday statement, the company faces a demand to fulfill its $ 260 million obligation. He said other creditors may demand debt repayment sooner than usual if they fail to meet their obligations.
The company missed the interest payment deadline for some bonds, but paid before the grace period expired and was declared by default. Evergrande also said that some bondholders can choose to pay by receiving an apartment under construction.
According to a government statement, Evergrande Chairman Xu Jiayin was summoned on Friday to meet with officials from his hometown of Guangdong. The statement said a government team would be dispatched to Evergrande headquarters to assist in overseeing risk management.
The Evergrande struggle could lead to financial pressures on real estate (the industry that propelled China’s explosive economic boom from 1998 to 2008) leading to banking troubles and the sudden collapse of politically dangerous growth. I urged a warning that there is.
Also on Friday, another developer, Kaisa Group Holdings Ltd., warned that it could fail to repay its $ 400 million bond next week.
Medium-sized developer Fantasia Holdings Group announced on October 5 that it has failed to pay $ 205.7 million for bondholders.
Hundreds of small Chinese developers have gone bankrupt since regulators began tightening the industry’s financial controls in 2017.
The slowdown in construction helped push down China’s economic growth by 4.9%, which was unexpectedly low compared to a year ago in the three months to September. Predictors expect growth to slow further if funding restraints are maintained.
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Chinese developers warn that they may run out of money | WGN Radio 720
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