Struggling Chinese Developer Evergrande Warns It Could Run out of Money
December 03, 2021
Associated Press
BEIJING —
A Chinese developer that is struggling under $310 billion in debt warned Friday it may run out of money to "perform its financial obligations" — sending regulators scrambling to reassure investors that China's financial markets can be protected from a potential impact.
Evergrande Group's struggle to comply with official pressure to reduce debt has fueled anxiety that a possible default might trigger a financial crisis. Economists say global markets are unlikely to be affected, but banks and bondholders might suffer because Beijing wants to avoid a bailout.
WATCH: Why Is China's Evergrande in Trouble?
After reviewing Evergrande's finances, "there is no guarantee that the Group will have sufficient funds to continue to perform its financial obligations," the company said in a statement through the Hong Kong Stock Exchange.
Shortly after that, regulators tried to soothe investor fears by issuing statements saying China's financial system was strong and that default rates are low. They said most developers are financially healthy and that Beijing will keep lending markets functioning.
"The spillover impact of the group's risk events on the stable operation of the capital market is controllable," the China Securities Regulatory Commission said on its website. The central bank and bank regulator issued similar statements.
Beijing tightened restrictions on developers' use of borrowed money last year in a campaign to rein in surging corporate debt that is seen as a threat to economic stability.
The ruling Communist Party has made reducing financial risk a priority since 2018. In 2014, authorities allowed the first corporate bond default since the 1949 communist revolution. Defaults have gradually been allowed to increase in hopes of forcing borrowers and investors to be more disciplined.
Despite that, total corporate, government and household debt rose from the equivalent of 270% of annual economic output in 2018 to nearly 300% last year, unusually high for a middle-income country. Economists say a financial crisis is unlikely but that debt could drag on economic growth.
Evergrande, the global real estate industry's biggest debtor, owes 2 trillion yuan ($310 billion), mostly to domestic banks and bond investors. It also owes $19 billion to foreign bondholders.
Evergrande said it has 2.3 trillion yuan ($350 billion) in assets, but the company has struggled to turn that into cash to pay bondholders and other creditors. It called off the $2.6 billion sale of a stake in a subsidiary last October because the buyer failed to follow through on its purchase.
Evergrande's statement Friday said the company faces a demand to fulfill a $260 million obligation. It said if that obligation cannot be met, other creditors might demand repayment of debts earlier than normal.
The company has missed deadlines to pay interest on some bonds but made payments before a grace period ended and was declared in default. Evergrande also said some bondholders can choose to be paid by receiving apartments that are under construction.
The Evergrande chairman, Xu Jiayin, was summoned to meet Friday with officials of its home province of Guangdong, a government statement said. The statement said a government team would be sent to Evergrande headquarters to help oversee risk management.
Evergrande's struggle has prompted warnings that a financial squeeze on real estate — an industry that propelled China's explosive 1998-2008 economic boom — could lead to trouble for banks and an abrupt and politically dangerous collapse in growth.
Also Friday, another developer, Kaisa Group Holdings Ltd., warned it might fail to pay off a $400 million bond due next week.
A midsize developer, Fantasia Holdings Group, announced October 5 that it failed to make a $205.7 million payment due to bondholders.
Hundreds of smaller Chinese developers have gone bankrupt since regulators began tightening control over the industry's finances in 2017.
The slowdown in construction helped to depress China's economic growth an unexpectedly low 4.9% over a year earlier in the three months ending in September. Forecasters expect growth to decelerate further if the financing curbs stay in place.
December 03, 2021
Associated Press
FILE - A security guard stands at the headquarters of China Evergrande Group
in Hong Kong, Oct. 4, 2021.
BEIJING —
A Chinese developer that is struggling under $310 billion in debt warned Friday it may run out of money to "perform its financial obligations" — sending regulators scrambling to reassure investors that China's financial markets can be protected from a potential impact.
Evergrande Group's struggle to comply with official pressure to reduce debt has fueled anxiety that a possible default might trigger a financial crisis. Economists say global markets are unlikely to be affected, but banks and bondholders might suffer because Beijing wants to avoid a bailout.
WATCH: Why Is China's Evergrande in Trouble?
After reviewing Evergrande's finances, "there is no guarantee that the Group will have sufficient funds to continue to perform its financial obligations," the company said in a statement through the Hong Kong Stock Exchange.
Shortly after that, regulators tried to soothe investor fears by issuing statements saying China's financial system was strong and that default rates are low. They said most developers are financially healthy and that Beijing will keep lending markets functioning.
"The spillover impact of the group's risk events on the stable operation of the capital market is controllable," the China Securities Regulatory Commission said on its website. The central bank and bank regulator issued similar statements.
Beijing tightened restrictions on developers' use of borrowed money last year in a campaign to rein in surging corporate debt that is seen as a threat to economic stability.
The ruling Communist Party has made reducing financial risk a priority since 2018. In 2014, authorities allowed the first corporate bond default since the 1949 communist revolution. Defaults have gradually been allowed to increase in hopes of forcing borrowers and investors to be more disciplined.
Despite that, total corporate, government and household debt rose from the equivalent of 270% of annual economic output in 2018 to nearly 300% last year, unusually high for a middle-income country. Economists say a financial crisis is unlikely but that debt could drag on economic growth.
Evergrande, the global real estate industry's biggest debtor, owes 2 trillion yuan ($310 billion), mostly to domestic banks and bond investors. It also owes $19 billion to foreign bondholders.
Evergrande said it has 2.3 trillion yuan ($350 billion) in assets, but the company has struggled to turn that into cash to pay bondholders and other creditors. It called off the $2.6 billion sale of a stake in a subsidiary last October because the buyer failed to follow through on its purchase.
Evergrande's statement Friday said the company faces a demand to fulfill a $260 million obligation. It said if that obligation cannot be met, other creditors might demand repayment of debts earlier than normal.
The company has missed deadlines to pay interest on some bonds but made payments before a grace period ended and was declared in default. Evergrande also said some bondholders can choose to be paid by receiving apartments that are under construction.
The Evergrande chairman, Xu Jiayin, was summoned to meet Friday with officials of its home province of Guangdong, a government statement said. The statement said a government team would be sent to Evergrande headquarters to help oversee risk management.
Evergrande's struggle has prompted warnings that a financial squeeze on real estate — an industry that propelled China's explosive 1998-2008 economic boom — could lead to trouble for banks and an abrupt and politically dangerous collapse in growth.
Also Friday, another developer, Kaisa Group Holdings Ltd., warned it might fail to pay off a $400 million bond due next week.
A midsize developer, Fantasia Holdings Group, announced October 5 that it failed to make a $205.7 million payment due to bondholders.
Hundreds of smaller Chinese developers have gone bankrupt since regulators began tightening control over the industry's finances in 2017.
The slowdown in construction helped to depress China's economic growth an unexpectedly low 4.9% over a year earlier in the three months ending in September. Forecasters expect growth to decelerate further if the financing curbs stay in place.
'JUST A ONE OFF'
Chinese regulators say Evergrande default an individual case, impact controllableXinhua, December 4, 2021
The recent default of property developer China Evergrande Group is an individual case and will pose little impact on the market, the country's regulatory authorities said Friday.
Evergrande's problem was mainly caused by its own mismanagement and break-neck expansion, an official with the People's Bank of China (PBOC) told the press when asked to comment on Evergrande's recent default on guarantee obligation.
The overseas U.S. dollar bond market is quite mature with well-defined legal provisions and procedures on how to deal with relevant issues and its investors are good at risk identification, said the official. "The risks caused by a certain individual real estate firm in the short term will not undermine the fund-raising function of the market for the medium and long run."
Housing sales, land purchases and financing have already returned to normal in China. Some Chinese property developers are beginning to buy back their overseas bonds, and investors are also starting to buy dollar bonds issued by Chinese property developers, according to the PBOC.
China is committed to creating a level-playing field and advancing the two-way opening-up of its financial markets. Relevant Chinese authorities will continue to communicate with their overseas regulatory counterparts, said the central bank.
The PBOC stated that companies issuing bond overseas and their shareholders will be urged to strictly follow market disciplines, properly handle their debt issues, and meet their debt obligations in accordance with law and market principles. For those firms which would like to make outward remittances for debt repayment or bond buy-back purposes, relevant authorities in China will support and facilitate their efforts under the existing policy framework.
The PBOC supported the provincial government of Guangdong in sending a team of advisors to the firm, noting that this will help Evergrande resolve its risks, enhance its internal risk management and maintain normal business operation.
"We will continue to work together with the provincial government of Guangdong, the relevant agencies as well as local governments in risk resolution, with the aim of promoting stable and healthy development of the real estate sector, and safeguarding lawful rights and interests of home buyers," the PBOC official said.
"We believe that regulatory authorities in relevant jurisdictions would handle this issue in a law-based and fair manner," a spokesman with the China Banking and Insurance Regulatory Commission (CBIRC) said.
Noting the current default will not have negative impact on the safe and sound operation of China's banking and insurance industries, the spokesman said there will be no change for the principles and stance upheld by the financial regulatory agencies in protecting the legitimate rights of consumers, investors and businesses according to the law.
There will be no change for China's market-oriented financial reform and opening-up under the rule of law and in accordance with international standards, said the spokesman.
Currently, Guangdong provincial government, other relevant local governments and agencies are guiding and urging Evergrande Group and its affiliates to resolve risks steadily and orderly in accordance with laws and regulations, and to proactively resume and complete housing construction for delivery to buyers. Financial institutions including banks and insurance companies are also actively participating in relevant work, said the CBIRC.
China's real estate industry as a whole remains robust, and most property firms are focusing on and properly managing their main lines of business, said the China Securities Regulatory Commission (CSRC).
"Currently, the A-share market remains stable, resilient and active," said the securities regulator, stressing that the potential overflow effect of Evergrande's risks on the stability of China's capital markets is under control.
The default rate on the exchange bond market has been at a relatively low level of 1%, and public companies and bond issuers with real-estate businesses have kept their major financial metrics intact, it said.
To promote the stable and sound development of both the capital markets and real estate industry in China, the CSRC said it will continue to maintain the effective fund-raising function of the country's capital markets and support the normal financing needs of real estate companies.
The recent default of property developer China Evergrande Group is an individual case and will pose little impact on the market, the country's regulatory authorities said Friday.
Evergrande's problem was mainly caused by its own mismanagement and break-neck expansion, an official with the People's Bank of China (PBOC) told the press when asked to comment on Evergrande's recent default on guarantee obligation.
The overseas U.S. dollar bond market is quite mature with well-defined legal provisions and procedures on how to deal with relevant issues and its investors are good at risk identification, said the official. "The risks caused by a certain individual real estate firm in the short term will not undermine the fund-raising function of the market for the medium and long run."
Housing sales, land purchases and financing have already returned to normal in China. Some Chinese property developers are beginning to buy back their overseas bonds, and investors are also starting to buy dollar bonds issued by Chinese property developers, according to the PBOC.
China is committed to creating a level-playing field and advancing the two-way opening-up of its financial markets. Relevant Chinese authorities will continue to communicate with their overseas regulatory counterparts, said the central bank.
The PBOC stated that companies issuing bond overseas and their shareholders will be urged to strictly follow market disciplines, properly handle their debt issues, and meet their debt obligations in accordance with law and market principles. For those firms which would like to make outward remittances for debt repayment or bond buy-back purposes, relevant authorities in China will support and facilitate their efforts under the existing policy framework.
The PBOC supported the provincial government of Guangdong in sending a team of advisors to the firm, noting that this will help Evergrande resolve its risks, enhance its internal risk management and maintain normal business operation.
"We will continue to work together with the provincial government of Guangdong, the relevant agencies as well as local governments in risk resolution, with the aim of promoting stable and healthy development of the real estate sector, and safeguarding lawful rights and interests of home buyers," the PBOC official said.
"We believe that regulatory authorities in relevant jurisdictions would handle this issue in a law-based and fair manner," a spokesman with the China Banking and Insurance Regulatory Commission (CBIRC) said.
Noting the current default will not have negative impact on the safe and sound operation of China's banking and insurance industries, the spokesman said there will be no change for the principles and stance upheld by the financial regulatory agencies in protecting the legitimate rights of consumers, investors and businesses according to the law.
There will be no change for China's market-oriented financial reform and opening-up under the rule of law and in accordance with international standards, said the spokesman.
Currently, Guangdong provincial government, other relevant local governments and agencies are guiding and urging Evergrande Group and its affiliates to resolve risks steadily and orderly in accordance with laws and regulations, and to proactively resume and complete housing construction for delivery to buyers. Financial institutions including banks and insurance companies are also actively participating in relevant work, said the CBIRC.
China's real estate industry as a whole remains robust, and most property firms are focusing on and properly managing their main lines of business, said the China Securities Regulatory Commission (CSRC).
"Currently, the A-share market remains stable, resilient and active," said the securities regulator, stressing that the potential overflow effect of Evergrande's risks on the stability of China's capital markets is under control.
The default rate on the exchange bond market has been at a relatively low level of 1%, and public companies and bond issuers with real-estate businesses have kept their major financial metrics intact, it said.
To promote the stable and sound development of both the capital markets and real estate industry in China, the CSRC said it will continue to maintain the effective fund-raising function of the country's capital markets and support the normal financing needs of real estate companies.
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