Struggling Chinese developer warns he could run out of money
A Chinese developer struggling with debt of less than $ 310 billion warned on Friday it could run out of money to “meet its financial obligations” – sending regulators scrambling to reassure investors that the financial markets Chinese can be protected from potential impact.
The Evergrande group’s struggle to comply with official pressure to reduce debt has fueled concerns that a possible default could trigger a financial crisis. Economists say global markets are unlikely to be affected, but banks and bondholders could suffer because Beijing wants to avoid a bailout.
After reviewing Evergrande’s finances, “there is no guarantee that the group will have sufficient funds to continue to meet its financial obligations,” the company said in a statement via the Hong Kong Stock Exchange.
Soon after, regulators attempted to allay investor fears by issuing statements claiming that China’s financial system was strong and default rates were low. They said most of the developers are in good financial health and Beijing will continue to operate in the loan markets.
“The impact of the group’s risk events on the stable functioning of the capital market is controllable,” the China Securities Regulatory Commission said on its website. The central bank and the banking regulator have issued similar statements.
Beijing last year tightened restrictions on the use of borrowed money by developers as part of a campaign to curb rising corporate debt, seen as a threat to economic stability.
The ruling Communist Party has made reducing financial risks a priority since 2018. In 2014, authorities authorized the first default on corporate bonds since the communist revolution of 1949. Defaults gradually increased in the hope of forcing borrowers and investors to be more disciplined.
Despite this, total corporate, government and household debt fell from the equivalent of 270% of annual economic output in 2018 to almost 300% last year, an unusually high level for a middle-income country. . Economists say a financial crisis is unlikely, but debt could hold back economic growth.
Evergrande, the world’s largest real estate debtor, owes 2,000 billion 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 it into cash to pay bondholders and other creditors. He canceled the sale of $ 2.6 billion of a stake in a subsidiary last October because the buyer did not follow through on his purchase.
Evergrande’s statement on Friday said the company was facing a demand to fulfill a $ 260 million bond. He said that if this obligation could not be fulfilled, other creditors could demand repayment of debts earlier than normal.
The company missed the interest payment deadlines on some bonds, but made payments before the end of a grace period and was declared in default. Evergrande also said that some bondholders may choose to be paid by receiving apartments under construction.
Evergrande president Xu Jiayin was summoned on Friday to meet with officials from his home province of Guangdong, according to a government statement. The statement said a government team will be dispatched to Evergrande headquarters to help oversee risk management.
Evergrande’s struggle sparked warnings that a financial squeeze on real estate – an industry that propelled China’s explosive economic boom from 1998 to 2008 – could lead to problems for banks and a brutal and politically dangerous collapse. of growth.
Also on Friday, another developer, Kaisa Group Holdings Ltd., warned it may default on a $ 400 million bond due next week.
A mid-sized developer, Fantasia Holdings Group, announced on October 5 that it had failed to make the $ 205.7 million payment owed to bondholders.
Hundreds of small Chinese developers have gone bankrupt since regulators began to tighten control over the industry’s finances in 2017.
The construction slowdown helped depress China’s economic growth to a surprisingly low 4.9% from a year earlier in the three months ending in September. Forecasters expect growth to slow further if funding restrictions remain in place.