China’s real estate market faces more nationalizations

Hui Ka Yan, chairman of China Evergrande Group, attends a news conference on the real estate developer’s annual results in Hong Kong, China March 28, 2017. REUTERS/Bobby Yip/File Photo – RC2BVQ9AGILG

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HONG KONG, Dec 6 (Reuters Breakingviews) – Private Chinese builders could struggle to stay private any longer. Evergrande, the country’s most indebted developer, has admitted it could officially default. Read more With $10 billion in housing bonds maturing in January alone, officials are under pressure to keep the sector from collapsing without easing their hard line on debt levels.

It’s no surprise that China Evergrande (3333.HK) is unlikely to find the money. President Hui Ka Yan even resorted to his personal wealth, according to a Reuters report. But so far, only a few smaller peers have officially defaulted on the public market. Now, Evergrande says it has received a demand for payment under a $260 million guarantee obligation, after already failing to make $82.5 million in coupon payments. The 30-day grace period ends on Monday, when Evergrande will have officially defaulted for the first time.

Financial regulators released statements on Friday saying Evergrande was an isolated case. That evening, Premier Li Keqiang signaled an upcoming cut in banks’ reserve requirement ratios, while the Evergrande provincial government in Guangdong sent a task force to oversee “risk management.” This is similar to what happened to aviation conglomerate HNA before a restructuring. But while HNA was somewhat unique, Evergrande is just the worst member of a struggling team with $1.5 trillion in loans outstanding as of September. In January alone, they need to find $10 billion for maturing offshore and onshore bonds, according to data from consultancy China Index Academy.

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The policy easing has been disappointing. Central bank officials have said banks should not tighten credit to developers too much, and there are signs that some are being allowed to issue onshore bonds and asset-backed securities. But the beneficiaries have mainly been state-controlled developers like Poly Developments (600048.SS) and China Merchants Shekou (001979.SZ). A property manager told Breakingviews that some bankers had informed him that they had received advice to avoid private property companies.

As private companies like Kaisa (1638.HK) and Sunac (1918.HK) – the largest dollar bond issuers after Evergrande – try to conserve cash, they struggle to complete pre-sold projects and to pay suppliers. This is where the risk of contagion lies, and Beijing must ward it off. As more capital flows to public developers, they will be the first to step in to help, and another once vibrant part of China’s private economy will increasingly be controlled by the state.

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BACKGROUND NEWS

– China Evergrande warned in a Hong Kong stock exchange filing on December 3 that there is no guarantee the group will have sufficient funds to continue to meet its financial obligations given its liquidity status current.

– Evergrande had received a demand for payment under a $260 million guarantee obligation, according to the filing. He has already missed a payment deadline of $82.5 million and the 30-day grace period ends on December 6.

– The government of southern China’s Guangdong province, where Evergrande is based, said in a statement Dec. 3 that it had summoned Evergrande chairman Hui Ka Yan immediately after the statement was made. ‘business. He added that he would send a task force to Evergrande, at the company’s request, to oversee its risk management and seek stronger internal controls.

– In a series of seemingly coordinated statements late in the evening of Dec. 3, China’s central bank, banking and insurance regulator and its securities regulator said Evergrande’s risks to the real estate and financial sector within the meaning wide are limited. The People’s Bank of China said the offshore bond market is “heavily market-driven” with mature investors, and issues with individual developers won’t stop others from raising debt in the longer-term market. .

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Editing by Pete Sweeney and Katrina Hamlin

Our standards: The Thomson Reuters Trust Principles.

Penny D. Jackson