Explainer: Chinese builder debt struggle rattles investors | WGN Radio 720

Beijing (AP) — Investors around the world are nervous as one of China’s largest real estate developers is trying to avoid a $ 310 billion default.

The Evergrande Group, struggling to turn its assets into cash, shook the financial markets on Friday when it warned that it could run out of money. Missing payments of bonds and other debt could lead to an avalanche of demands to pay other debt immediately, he said.

The ruling Communist Party can keep the credit market functioning, but it will not bail out the Evergrande Group, which the central bank has accused of recklessly borrowing, economists say. They say it would be a false signal when Beijing is trying to force companies to reduce their dangerously high debt burden.

On Friday, Evergrande said it was required to meet its $ 260 million debt and cannot guarantee that it could catch up with it.

Central banks and banking regulators were in a hurry to reassure the public that China’s economy could be protected from the problems of the Evergrande Group. They promised that the lending market would continue to function.

See concerns about Evergrande and its debt:

What is Evergrande?

Founded in 1996, Evergrande Group is one of the largest builders of apartments, office towers and shopping malls in China.

According to the company, it employs more than 200,000 people and supports 3.8 million jobs in the construction and other industries. Evergrande states that it has 1,300 projects in 280 cities and assets of 2.3 trillion yuan ($ 350 billion).

According to Hurun Report, the founder of Evergrande Group, Xu Jiayin was the wealthiest entrepreneur in China in 2017 with a net worth of $ 43 billion, following the wealthy in China. He dropped the list down as the internet industry was booming, but he was still ranked as the wealthiest real estate developer in China last year. He also surpassed Hurun’s 2020 philanthropist list and donated an estimated 2.8 billion yuan ($ 420 million).

Evergrande is expanding into businesses such as electric vehicles, theme park development, health clinics and mineral water.

What is the distant effect?

Evergrande’s shares traded in Hong Kong fell 90% this year. The bond is traded at a 75% discount on its par value.

Xu built Evergrande with the money he borrowed. According to the company, bondholders, banks, construction contractors and other creditors have a debt of RMB 2 trillion ($ 310 billion).

In June, it announced that it would have a debt of 240 billion yuan ($ 37.3 billion) within a year, almost three times the company’s cash holdings of 86.8 billion yuan ($ 13.5 billion).

Evergrande reported a profit of $ 1.4 billion in the first half of the year, but said sales declined as news of the cash crisis strained buyers.

Why now?

Evergrande has been squeezed last year by the restrictions imposed on real estate-related borrowing.

Economists have warned that China’s debt growth has been a threat for over a decade. Since 2018, mitigating financial risk has become a ruling party’s priority. However, total corporate, government and household borrowing has risen to nearly 300% of last year’s annual economic output. This is an unusually high number for a middle-income country.

According to the news report, Evergrande borrows as much as possible, including asking construction contractor employees to buy debt. The central bank said in an unusually sharp comment on Friday that the problem was due to “poor control and blind expansion.”

According to business news magazine Caixin, in 2017 Shenzhen’s state-run China CITIC Bank will invest 40 billion yuan ($ 6.2 billion) in the Evergrande project only after executives have agreed to invest at least 3 million yuan ($ 465,000) each. I agreed to lend it.

How does this fit into the party’s plans to rebuild the Chinese economy?

China’s economic boom was driven by a construction frenzy that obscured the city of new apartments, shopping malls and other buildings. Now, the ruling party wants to change course based on domestic consumption, not trade or investment, and foster independent economic growth.

China’s first default of corporate debt since the 1949 revolution was allowed to occur in 2014 as part of an effort to make borrowers and lenders more disciplined. Until then, bankrupt borrowers were bailed out by the government to avoid financial market turmoil. Beijing has gradually allowed more defaults, but nothing by a larger debtor than Evergrande.

What about other developers?

Other major developers such as Vanke Co., state-owned Poly Group, and Wanda Group have not yet reported similar issues. However, hundreds of small developers have closed since regulators tightened control over funding strategies, such as selling apartments before construction began in 2017.

Residential real estate is considered a low risk to the financial system, as most apartments are purchased in cash rather than mortgages. As a result, the wave of foreclosures and the burden on banks are unlikely to occur, as they did in the United States after the 2008 crisis.

Medium-sized developer Fantasia Holdings Group announced on October 5 that it has failed to pay $ 205.7 million for bondholders. Another Kaisa Group Holdings Ltd. has warned that it could fail to repay the $ 400 million bond due this week.

Possible bids to show that the industry is healthy allow others to issue new debt. According to the newspaper China Securities News, total bonds sold in November were RMB47.1 billion ($ 7.4 billion), up 84% month-on-month.

Are there any risks outside of China?

Investors are worried about the potential global impact, but economists refer to the 2008 collapse of Wall Street bank Lehman Brothers, the symbolic beginning of the global crisis, Evergrande. Says it will not be the “Lehman Moment” of China.

Evergrande owes $ 18 billion to foreign currency bond owners, many of which are held by Chinese banks and other institutions. Unlike Lehman, which was a financial product with a price that could fluctuate significantly, Evergrande owns 1.4 trillion yuan ($ 215 billion) of land and partially completes the project at a relatively stable price. Did.

ING economist Iris Pang said that even a complete default in financial markets is “a very short temporary break of a week or so” and “not comparable to Lehman.”

If Evergrande cannot repay the loan, the total annual profit of China’s state banking industry will be 1.9 trillion yuan ($ 300 billion) and the reserve will be 5.4 trillion yuan ($ 850 billion).

What’s next?

Regulators seem to be focused on ensuring that homebuyers get the apartments they paid for and prevent financial surprises.

Evergrande has formed a “risk management” panel with experts from other companies. The government, which is home to Guangdong Province, has sent teams to the Evergrande Group headquarters to oversee its operations. The city or state where the Evergrande project is located has set up a team to scrutinize the finances.

The government has also promised steps to support economic growth, which fell to an unexpectedly low of 4.9% in the first half of the quarter ending September due to slowing construction and real estate sales.

On Monday, the central bank increased the amount available for banks to lend by 1.2 trillion yuan ($ 190 billion).

Explainer: Chinese builder debt struggle rattles investors | WGN Radio 720

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