Chinese builder's debt struggle rattles investorsWednesday, September 22, 2021
BEIJING, China (AP) — Global investors are watching nervously as one of China's biggest real estate developers struggles to avoid defaulting on tens of billions of dollars of debt. That's fueling fears of possible wider shock waves for the Chinese financial system. Chinese regulators have yet to say what they might do about Evergrande Group.
Economists expect Beijing to intervene if Evergrande and lenders can't agree on how to handle its debts. But any official resolution is expected to involve losses for banks and bondholders. Investors are watching how the developer headquartered in the southern city of Shenzhen near Hong Kong handles an interest payment due Thursday on one of its bonds. The payments total more than US$100 million.
Evergrande, the world's most indebted property developer, is crumbling under the weight of more than US$300 billion of debt and has been warned more than once it could default. Banks have reportedly declined to extend new loans to buyers of uncompleted Evergrande residential projects while ratings agencies have repeatedly downgraded the firm, citing its liquidity crunch.
Some economists have warned that the collapse of Evergrande could become China's “Lehman moment” — a reference to the bankruptcy of Lehman Brothers as a result of the subprime mortgage crisis which triggered the 2008 global financial crisis. Evergrande's debt burden is so large that analysts have warned that risks could spread throughout China. The company holds about 6.5 per cent of the total debt held by China's property sector, according to an estimate by UBS.
Goldman Sachs analysts warned of “rising risks” from the Chinese property market.
“Concerns over Evergrande are rising and signs of financing difficulties spreading to other developers are emerging,” they said in a research report published Sunday night. The Chinese Government needs to “carefully manage” Evergrande's potential default or restructuring while delivering a clear message to help “shore up confidence and to stop the spillover effect”, they said.
Evergrande has about 200,000 employees, raked in more than US$110 billion in sales last year and has more than 1,300 developments, according to the company. Its huge liabilities are widely held by financial institutions, retail investors, homebuyers and suppliers in the construction, materials and design industries.
Trouble at the heavily indebted property giant has been brewing for the past year. In August 2020 Beijing began containing the property sector's excessive borrowing in an attempt to prevent the housing market from overheating and to curb debt growth.
Shares of Evergrande Group plummeted 10 per cent in Hong Kong on Monday, hitting just 2.28 Hong Kong dollars (US$0.29) per share. The stock has shed 84 per cent so far this year, plunging below its 2009 IPO price of 3.5 Hong Kong dollars (US$0.45). The Hang Seng Index (HSI) on Monday dropped 3.3 per cent, suffering its worst decline in nearly two months, as Chinese banks, insurers and other real estate companies were slammed.