Chinese real estate market faces more nationalization

Reuters
Reuters

HONG KONG (Reuters Breakingviews) – Chinese private carmakers may find it difficult to stay private any longer. Evergrande, the nation’s most indebted developer, has admitted it could officially default. With $ 10 billion in real estate bonds maturing in January alone, authorities are under pressure to prevent the sector from collapsing without loosening their hard line on debt levels.

It is no surprise that China Evergrande cannot find the money. President Hui Ka Yan even resorted to his personal fortune, according to a Reuters report. But so far only a few small peers have officially defaulted on the public market. Now, Evergrande says it received a request for payment under a $ 260 million guarantee obligation, having previously failed to make $ 82.5 million in coupon payments. The 30-day grace period expires on Monday, when Evergrande will have officially defaulted for the first time.

Financial regulators issued statements on Friday claiming Evergrande is an isolated case. That evening, Premier Li Keqiang signaled an upcoming decline in the reserve requirement ratio of banks, while the Evergrande provincial government in Guangdong sent a task force to oversee “risk management.” It sounds like what happened to the aviation conglomerate HNA before a restructuring. But while HNA was somewhat unique, Evergrande is just the worst member of a struggling crew with $ 1.5 trillion in loans outstanding as of September. In January alone, they must find $ 10 billion to mature offshore and onshore bonds, according to data from consultancy China Index Academy.

The easing of policies has been disappointing. Central bank officials have said banks shouldn’t tighten developer credit too much, and there are signs some are allowed to issue onshore bonds and asset-backed securities. But the beneficiaries have mostly been state-controlled developers like Poly Developments and China Merchants Shekou. A real estate manager told Breakingviews that some bankers have informed him that they have received advice on avoiding private real estate companies.

As private companies like Kaisa and Sunac – the biggest issuers of dollar bonds after Evergrande – try to conserve cash, they struggle to complete pre-sold projects and pay vendors. This is where the risk of contagion lies, and Beijing must avoid it. As capital flows to state developers, they will be the first to step in to help, and another once vibrant part of China’s private economy will be increasingly state controlled.

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NEWS CONTEXT

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

– 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 December 3 statement that it 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 request a strengthening of internal control.

– In a series of apparently coordinated statements late on the evening of December 3, China’s central bank, banking and insurance regulator, and its securities regulator indicated that Evergrande’s risks to the real estate and financial sector as defined 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 will not prevent others from taking on debt in the longer term market. .

(Edited by Pete Sweeney and Katrina Hamlin)

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Penny D. Jackson