China's biggest property developer on brink of default

The rescue of embattled Chinese property company Evergrande appears to have stalled, leaving the developer on the brink of default and threatening to unleash contagion through the country s giant real estate sector, home prices and the economy.

The problems enveloping Evergrande, which has eyewatering total debts of $305 bn, have hung over global financial markets in recent weeks and helped curb China s post-pandemic recovery.

But the crisis could deepen if Evergrande fails to meet a deadline of Saturday night to stump up a $83.5 m bond interest payment, triggering an official default.

Evergrande has already missed the initial deadline in September after missing a 30-day grace period to make the repayment. It has since missed other key offshore, dollar-denominated bond payments worth another $193.3 m. The clock is now ticking on those debts as well.

The sprawling property-to-electric-cars empire founded by former steel executive Xu Jiayin in the mid 90 s has been scrambling to offload assets in order to pay back some of its loans. Its foreign investors are expected to be prioritised, with Chinese investors at the back of the queue.

Shares in its main Hong Kong listing have lost 80% in the past year and have been suspended since 4 October pending an announcement on how it is going to be rescued.

But there were signs that the process has not been running to plan, raising the prospect that Beijing will be forced to engineer a dismantling of Evergrande, the country s second largest developer, by absorbing most of it into existing state-owned enterprises.

First, Evergrande s negotiations to sell its 51% stake in its profitable property management unit, Evergrande Property Services Group, to another Chinese developer for $2.6 bn have been suspended, according to reports. The buyer, Evergrande s Holdings, reportedly could not obtain the necessary agreement from the provincial government in Guangdong, which is overseeing Hopson Development Holdings s restructuring.

The sale of Evergrande's 26-storey waterfront headquarters in Hong Kong was expected to raise another $1.7 bn but the deal with Yuexiu has also been placed on hold for the same reason.

The state of the Chinese economy, which accounts for about 25% of the property market, makes for an alarming backdrop to these problems. Home sales by value tumbled 16.9% in September from a year earlier, after a 19.7% drop in August, according to Bloomberg calculations based on official data released on Monday.

With many other developers also struggling to repay loans and feeling the squeeze, the potentially colossal default of Evergrande could capsize the weakest, most debt-laden parts of the property sector.

China Properties joined a dozen others that have defaulted on over 47 bn yuan $7.3 bn of bonds this year, per an estimate from CRIC, a Chinese property consultancy, Reuters reported on Friday. S&P Global downgraded two of the bigger players, Greenland, which has extensive developments in London, Sydney and New York, and E-house Enterprise.

A smaller developer, Sinic Holdings, became the latest to have its rating put in selective default by S&P after it defaulted on $246 m in bonds, having warned it was likely to do so last week.

Terry Chan, a senior research fellow at S&P Global Ratings, said the situation risked exposing other large Chinese companies that have expanded in similarly rapid fashion on the back of three decades of debt-fuelled, breakneck economic growth.

Should Evergrande default, there may be contagion effects for other developers, home prices, and the economy. Evergrande s cashflow troubles foreshadow what could go wrong for liquidity-challenged Chinese corporates, he said.

China s corporate sector accounts for almost a third of the global corporate debt, according to a survey by S&P of 25,000 companies across the world. The sector s debt-to-GDP leverage ratio of 159% is one of the world s highest the current global ratio is 101% and presents a staggering $27 tn headache for Beijing.

China s president Xi Jinping has shown in recent years that he is determined to tackle the issue as he pursues his goal of common prosperity He has clipped the wings of tech billionaires such as Jack Ma with firms forced to offload assets and concede control over data to regulators. Highly ambitious private tutoring services outlawed by China s ambitious city-dwelling parents have been outlawed too.

Now the property sector s speculative model is in Xi s sights. Last year s three red lines for balance sheets made it much harder for large developers such as Evergrande to secure the funding to keep the plates spinning on its borrow-and-build model.

However, Jamieson Coote Bonds in Melbourne, Australia said China s central bank was on the front foot flooding the market with liquidity another 100 bn yuan $15.6 bn on Wednesday and would contain the contagion.

Banks have been told to keep lending to healthy developers, he said. The biggest ones can cause a ripple effect but it s manageable without any contagion is our view. Beijing is going to let it down slowly. Helge Berger, head of the International Monetary Fund's China arm, told Bloomberg that the risks to the wider economy had been contained for now but that authorities should continue to monitor in case of escalation.