Evergrande crisis shows cracks in Chinese real estate market

Angry home buyers expect up to 1.6 million apartments. Suppliers who sold cement, paint, rebar and copper pipe owe more than $ 100 bil...


Angry home buyers expect up to 1.6 million apartments. Suppliers who sold cement, paint, rebar and copper pipe owe more than $ 100 billion in payments. The employees who were armed loans to lend are panicking now that the company cannot pay them back on time.

Chinese group Evergrande, the troubled real estate developer whose high debt has triggered panic in global markets, is crumbling under the weight of more than $ 300 billion in debt. The billionaire president of the company tell employees Tuesday that they would “come out of obscurity as soon as possible”.

But the question for many is whether the company can come out of its current crisis on its own without being led by Beijing. And experts are making increasingly gloomy predictions about Evergrande’s ability to hold out without a government bailout and the consequences of a possible collapse.

A dire prediction on the fate of the company arrived Tuesday for investors in Asia, this one from S&P Global Ratings. “We believe that Beijing would only be obliged to intervene if there was a large-scale contagion causing the failure of several major developers and posing systemic risks to the economy,” said the report, dated Monday.

The company’s shares and its bonds fell on Tuesday, but in more modest proportions than in the past few days and weeks. Its shares closed 0.4% lower, and shares of other China-focused developers that fell on Monday recovered some of their losses. Hong Kong’s Hang Seng Index, which fell 3.3% on Monday, ended the day with a gain of 0.5%.

A disorderly collapse of a company the size of Evergrande could have ripple effects in the world’s second-largest economy and beyond, including scare away from investors who have bet billions of dollars on the company’s success. A panic could also damage the Chinese real estate market, a huge source of the country’s growth which is increasingly prone to heavy borrowing and erratic house prices.

“Officials still have tools at their disposal to calm the panic,” said Zhiwu Chen, a professor of finance at the University of Hong Kong, who predicted that authorities would dismantle the company and sell its parts piecemeal. . “They’re under a lot of pressure to announce something soon. “The impact of an Evergrande collapse would largely depend on the attitude of key Chinese leaders.

For decades, the Chinese real estate market seemed to have no limits. Developers like Evergrande built cities with land, created jobs, gave the middle class to invest their savings, and enriched local governments who sold them land. Along the way, he created economic growth that stunned the world. Now the prices have gotten too high and Beijing is trying to slow things down.

He also tries to send a message that no business is too big to fail.

Many of Evergrande’s problems stem from new restrictions on home sales as Beijing tries to bring house prices under control and address growing concerns about home prices. The government has also sought to teach a lesson to developers who have borrowed heavily in recent years to build more properties and fund investments in other businesses. (In Evergrande’s case, these include interests that include electric cars and a soccer team.)

The possible default of a giant like Evergrande has highlighted the vulnerability of the Chinese real estate sector. If the business were to fail, some experts say, it could cause panic in the real estate industry that could become more difficult for Beijing to control.

“If we are in this downward spiral, without credible intervention, we are going to see a lot of real estate developers in trouble,” said Michael Pettis, professor of finance at Peking University.

Evergrande warned he was under tremendous pressure and hired restructuring experts to help him determine his future. He has an interest payment of $ 80 million on Thursday that he is likely to miss, which would cause more turmoil in the market.

While market watchers once took it for granted that Beijing would step in at the first sign of distress, rating agencies, banks and investors have all factored in a possible Evergrande default. Many are now predicting that Beijing will not step in until other real estate developers start to fail and pose a collective risk to the financial system as a whole.

Beijing has the tools to stop a financial disaster and keep a lid on the social discontent that is brewing around Evergrande. Its censors have already suppressed dozens of videos of protesters invading company offices in cities like Hefei and Shenzhen last week. His police warned employees who were trying to get the attention of local authorities to fire.

But it is Beijing’s authority over the country’s banks and largest financial institutions that provides its greatest power. The government can force panicked creditors to calm down and order banks to give Evergrande the money it needs to sue or take over part of the business.

It also firmly controls the flow of money across the country’s borders, allowing it to stem a potential rush of funds outside the country.

Yet the longer authorities wait to bail out Evergrande, the more other developers are likely to suffer as investors begin to question their assumptions about the wider sector.

Much like Evergrande, other Chinese real estate developers have huge debts and are being forced by regulators to repay them under “three red lines” rules that aim to limit the banking system’s exposure to real estate.

More generally, the real estate market is starting to slow down and industry practices that have helped increase sales and keep developers afloat – such as pre-selling properties before they are completed – are being questioned. Regulators in at least two provinces have announced new rules to crack down on illegal practices, including delays in delivering properties, misleading advertising or price manipulation practices.

Hong Kong-listed stocks of other major Chinese developers have become the target of investor angst in recent days as the Chinese stock market is on vacation. Sinic Holdings, a much smaller real estate developer, lost 87% of its value on Monday before its stock was halted.

“The question is, how much do they want to teach someone a lesson and how much are they willing to hurt other people because of it?” said Travis Lundy, an independent investment analyst based in Hong Kong.

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