China Evergrande Group halted trading of its shares on Monday amid news it had missed another key bond interest payment, bringing the beleaguered Chinese real estate giant closer to default.
The world’s most indebted property developer, Evergrande has been teetering on the edge of collapse for weeks now, as it struggles to address almost US$305-billion in liabilities, much of which is offshore. The company’s debts are equal to 2 per cent of China’s total GDP, sparking fears that a collapse could spread through the financial system and reverberate around the world – though worries have eased somewhat after the central bank vowed to protect homebuyers’ interests.
A potential means of doing so emerged Monday, as it was reported that fellow Guangdong-based property developer Hopson Development Holdings was due to acquire 51 per cent of Evergrande Property Services Group, in a deal worth around US$5.14-billion.
In a statement to the Hong Kong Exchange on Monday, Evergrande Property Services said there was a “possible general offer for the shares of the Company.” Trading in its shares were suspended pursuant to takeover rules, along with those of Hopson and China Evergrande, the parent company.
Evergrande Property Services operates in more than 290 cities in China and is contracted to manage more than 1,500 projects around the country, according to its website, “including medium and high-grade residential buildings, commercial properties, theme parks, industrial parks, health care complexes, themed towns and schools.”
“Looks like the property management unit is the easiest to dispose in the grand scheme of things, indicative of the company trying to generate near term cash,” said OCBC analyst Ezien Hoo. “I’m not sure this necessarily means that the company has given up on surviving, especially as selling an asset means they are still trying to raise cash to pay the bills.”
Hong Kong stocks sank on Monday, extending a four-month rout, as the Hang Seng Index fell to its lowest point since October last year. Japanese shares also ended lower, and European stocks struggled after the Monday opening.
News of Evergrande’s potential collapse last month rattled markets around the world, amid fears of a potential “Lehman moment” similar to how the collapse of the U.S. bank Lehman Brothers foreshadowed the 2008 financial crisis.
Evergrande’s massive over-leveraging is typical of China’s real estate market, which the authorities have been trying to rein in for years, concerned about the increasing price of property and potential economic damage a crash could cause.
Last year, the Chinese government introduced three “red lines” for property developers, requiring them to keep debt levels within reasonable bounds. Evergrande was in breach of all three, and soon found itself unable to raise more capital, even at one point reportedly approaching staff to loan the company money.
“The biggest problem is not a default by Evergrande but the environment that has led to its downfall. Authorities are regulating housing loans and lending to property firms. Markets are looking for a next Evergrande already,” said Kazutaka Kubo, senior economist at Okasan Securities.
“There is rising risk Evergrande’s woes will spread to the entire Chinese property sector.”
While the Chinese government is believed to be wary of bailing Evergrande out for fear this could send the wrong message, Paul Schulte, a former investment banker and founder of Schulte Research, said the company’s liabilities are “going to have to come out of someone’s pocket.”
“You have to put the debt somewhere, you can’t put the toothpaste back in the tube,” he said. “Either the banks are going to eat it, or the people who bought homes, or the government, or foreign [bond holders].”
While he said it was likely that there could be “a saviour coming in who’s a major property player,” Mr. Schulte predicted that nevertheless the government will have to “put some of this debt on the sovereign balance sheet.”
“We’re getting to a solution,” he added. “When people are in the mode of maximum panic is when you’re going to get a solution … China’s not interested in crisis. America leaps from one crisis to another, China doesn’t do crisis, they want things to be smooth.”
With a report from Reuters.
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