business

Chinese property giant Evergrande under 'tremendous pressure'

12 Comments

Embattled Chinese property giant Evergrande on Tuesday conceded it is under "tremendous pressure", a day after insisting it will avoid a bankruptcy that many fear could have a huge impact on the world’s number-two economy.

The Hong Kong-listed developer is sinking under a mountain of liabilities totalling more than $300 billion after years of borrowing to fund rapid growth.

The group was downgraded by two credit rating agencies last week while its shares tumbled below their 2009 listing price, as a battery of bad headlines and speculation of its imminent collapse ran out across Chinese social media.

On Monday anxious investors protested at the Shenzhen headquarters of the sprawling conglomerate, as Evergrande said it is facing "unprecedented difficulties" but denied rumors that it is about to go under.

But on Tuesday the company issued another statement to the Hong Kong stock exchange, saying it had hired financial advisers to explore "all feasible solutions" to ease its cash crunch and warned that there was no guarantee it would meet its financial obligations.

The firm blamed "ongoing negative media reports" for damaging sales in the pivotal September period, "thereby resulting in the continuous deterioration of cash collection by the Group which would in turn place tremendous pressure on the Group’s cashflow and liquidity".

Shares in the firm fell nine percent Tuesday, and are down almost 80 percent since the start of the year.

An estimate by Capital Economics says that Evergrande has some 1.4 million properties that it has committed to complete -- around 1.3 trillion yuan ($200 billion) in pre-sale liabilities, as of the end of June.

Its plight has raised fears of a contagion across the debt-laden Chinese property sector -- which accounts for more than a quarter of the economy -- with a knock on for banks and investors.

"Evergrande’s collapse would be the biggest test that China’s financial system has faced in years," said Mark Williams, chief Asia economist at Capital economics.

Yet "markets don’t seem concerned about the potential for financial contagion at the moment," he said, adding "that would change in the event of large-scale default", which would likely prod the central bank to step in and buttress the teetering developer.

"The most likely endgame is now a managed restructuring in which other developers take over Evergrande’s uncompleted projects in exchange for a share of its land bank," Williams said.

The pictures of angry investors outside the firm's Shenzhen HQ could also cause alarm in Beijing, where leaders are keen to keep a lid on any form of social unrest.

Some creditors have demanded immediate payback of loans, Bloomberg News reported earlier this month.

Evergrande has already sold stakes in some of its wide-ranging assets and offered steep discounts to offload apartments, but still reported a 29 percent slide in profit for the first half of the year.

It is also struggling to sell its Hong Kong headquarters, even at a loss.

The developer was founded in 1996 by Xu Jiayin, who went on to become China's richest man during the country's property boom of the 1990s.

He poured money into mass developments in new cities, raising $9 billion in its 2009 IPO in Hong Kong.

A year later Xu bought a struggling football team and renamed it Guangzhou Evergrande, lavishing millions of dollars on salaries for its stars and scooping titles.

Evergrande started to falter under the new "three red lines" imposed on developers in a state crackdown in August 2020 -- forcing the group to offload properties at increasingly steep discounts.

© 2021 AFP

©2021 GPlusMedia Inc.

12 Comments
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Beginning of the end for companies that grew and thrived on cheap money.

1 ( +2 / -1 )

This seems like the three red lines actually working as intended, preventing real estate firms from borrowing into [further] oblivion.

I don't have much sympathy for companies in general, but especially those that went under by overborrowing, especially when those funds are wasted.

2 ( +3 / -1 )

The top echalons of the CCP are the smartest, most forward looking capitalists in the world. Apartments and condos are for people to live in, not for capitalists to speculate with.

Marx's basic analysis can't even be overcome by the smartest capitalists but the CCP will make the 'good times' (relatively speaking) last longer than Western Europe, North America and Japan were able to manage.

-4 ( +1 / -5 )

The company is massively over leveraged and should collapse under the weight of its unsustainable debts but it is “too big to fail” the CCP/Chinese government can not allow it to fail as the economic fallout and contagion throughout the economy would be too damaging to its grip on power. There are thousands of “ghost castles” throughout China, the problems in the property development sector are not limited just to one company and the system of local government/land ownership is a major cause of the problem which the CCP dare not acknowledge.

4 ( +4 / -0 )

The metrics on good investment are the same globally. A lazy belief that the Chinese state will simply prop up any large company, so you can ignore endless red flags on excessive debt, is a sign of poor judgement or arrogant greed.

Washington may condemn every Chinese company as a puppet of the state for their own political reasons, but Beijing has its own agenda. If it wants to reduce the lemming-like approach to Capitalism that some of its citizens have adopted, it will need to allow some companies to fail and some investors will lose their shirts. It will manage this as best it can, and Western investors are likely to be amongst the fall guys.

No matter how big the trough, investors should still do their homework before plunging their snout in it. If due diligence is not possible (and in China it often is not), be aware that you are not investing, but gambling. There is a difference.

2 ( +2 / -0 )

Beginning of the end for companies that grew and thrived on cheap money.

This is your standard real estate bubble. For a few years the Chinese government was pumping a ton of cheap money into the system to keep up employment.

I don't have much sympathy for companies in general, but especially those that went under by overborrowing, especially when those funds are wasted.

And ofte tyme swich cursynge wrongfully retorneth agayn to hym that curseth, as a bryd that retorneth agayn to his owene nest. - Geoffrey Chaucer in The Parson's Tale, 1390.

In this context, the kung pao chickens are coming home to roost.

but the CCP will make the 'good times' (relatively speaking) last longer than Western Europe, North America and Japan were able to manage.

The CPC has enough money to bail out Evergrande, but we can argue that not allowing Evergrande to become insolvent and into liquidation will cause further troubles. If you only bail out Evergrande, then everyone else will expect a capital injection; and by the time things fall apart, you may not have the funds to deal with it.

The company is massively over leveraged and should collapse under the weight of its unsustainable debts but it is “too big to fail” the CCP/Chinese government can not allow it to fail as the economic fallout and contagion throughout the economy would be too damaging to its grip on power. 

These news grab the headlines since people take it as a sign that China is doomed. In fact, it will actually show the opposite; that the government sees a problem and deals with it.

There are thousands of “ghost castles” throughout China, the problems in the property development sector are not limited just to one company 

Were it just one company, then you'd write out a check and solve the problem. The issue here, as you've pointed out, is that there are other companies that have overleveraged themselves so there is a need to punish and make an example. Jack Ma and Alibaba would be the example in the crackdown on Big Tech. There will be at some point a conflict of interest.

Beijing has its own agenda. If it wants to reduce the lemming-like approach to Capitalism that some of its citizens have adopted, it will need to allow some companies to fail and some investors will lose their shirts. 

Chinese real estate is dropping drastically, but it is driven by the Chinese government. Real estate traditionally is used as a giant reservoir for money. The CPC hopes to crash the real estate speculation and divert money to small businesses for lending and investing.  They seem to be working on housing affordability for the masses, in contrast to, say, the housing crisis in California.

The CPC is about control. If Evergrande goes under with no lifeline or no new lease offered, it will be by design. There will inevitably be incorrect assessments of the party falling apart and flawed comparisons made with the global financial crisis/ Lehman Shock.

-2 ( +0 / -2 )

They seem to be working on housing affordability for the masses, in contrast to, say, the housing crisis in California.

When you throw out glib statements like that realize that there is no private land ownership in China as there is in California and pretty much every nation with an elected representative government. In China, all urban land is owned by the central government in Beijing and all agricultural land is owned by cooperatives. One may "won" a long term lease on a flat in a tall building in some big Chinese city but you never own your home and land as one does in California for example. Those facts matter because while in China the government owns the land and can do as it wishes with it, in other places people who own land can lean on their elected representatives to stop legislation, such as bills proposed by a California state senator to allow Chinese style high rise housing along "transportation corridors" from being passed. Those homeowners don't give a rip about inexpensive housing. They want to keep the value of their homes high so they can make a lot of money when they sell. Details like this matter. The housing markets in a place like China is fundamentally different than that of a democracy where land is in private hands.

3 ( +3 / -0 )

A detail other posters on this thread have missed is that many of these unoccupied housing units could be sold if the price was reduced. A few builders have tried to do this but they have been met with a buzzsaw of opposition from those who bought into the projects at the original higher prices. There have been protests, even riots at developments when developers announced price reductions. The reason is that these price reductions immediately reduce the value of existing units and their owners, if having a decades long lease can be called "ownership", found themselves underwater on their loans. This is a tightrope the CCP is going to have to walk as they try to liquidate the stock of unoccupied housing units and part of the reason why they remain unsold. The threat of social unrest has so far overridden the threat of a financial collapse.

1 ( +1 / -0 )

@Desert Tortoise In China, all urban land is owned by the central government in Beijing and all agricultural land is owned by cooperatives. One may "won" a long term lease on a flat in a tall building in some big Chinese city but you never own your home and land as one does in California for example. Partially true, in California you can own your own home but you NEVER OUTRIGHT own the land your home sits on!!! Just to make that clear and that is anywhere in the US!!

-1 ( +0 / -1 )

California you can own your own home but you NEVER OUTRIGHT own the land your home sits on!!! Just to make that clear and that is anywhere in the US!!

What on Earth are you talking about? My home and the land it sits on is paid for and I have clear title to it.

1 ( +1 / -0 )

When you throw out glib statements like that realize that there is no private land ownership in China as there is in California and pretty much every nation with an elected representative government. In China, 

Your point is well made. Governor Newsome does not have the same arsenal of policies at his disposal. My point is the authoritarian regime has an array of resources available for controlling the market and is actually doing something about it. They are completely behind this crash.

in California you can own your own home but you NEVER OUTRIGHT own the land your home sits on!!! Just to make that clear and that is anywhere in the US!!

Are you trying to be philosophical? Yes, we come empty handed into this world and leave empty handed.

What on Earth are you talking about? My home and the land it sits on is paid for and I have clear title to it.

If I may, I believe he means we never completely own our land in California or in the U.S. We own rights to the land, and the state always retains the right of eminent domain.

0 ( +0 / -0 )

We own rights to the land, and the state always retains the right of eminent domain.

In California taking land through eminent domain is restricted in that the land may only be used for a public use, the local governing body must approve a resolution of necessity to commence the eminent domain process and part of that process includes a court hearing or hearings. In order to adopt a resolution of necessity, the government agency must find (1) that the project for which the property is to be acquired is necessary; (2) that the property is necessary for the public project; (3) that the project is located in such a manner as to offer the greatest public benefit with the least private detriment; and (4) that an offer to purchase the property has been made. A court makes the final decision on the legality of the eminent domain and the final price paid. It is not arbitrary. Unlike some states in California your land cannot be taken from you and given to another private owner. The laws changed in 2018 in the aftermath of the dissolution of the old Redevelopment Agencies. Eminent domain became much harder to use.

0 ( +0 / -0 )

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