HONG Reuters - China Evergrande Group raises fresh warnings of default risks as it scrambles to raise funds to pay lenders and suppliers with regulators and financial markets worried that any crisis could ripple through China's banking system and trigger social unrest.
Founded in 1996 by Hui Ka Yan in Guangzhou, Evergrande is China’s second largest property developer with $110 billion in sales last year.
It has more than 1,300 developments across the nation, many in smaller cities.
With sales growth slowing in recent years, Evergrande has branched into businesses such as electric cars, football, insurance and bottled water.
Investors became worried in September last year after a leaked letter purportedly from Evergrande showed that the company had sought government support to approve a now-lost backdoor listing plan. Evergrande claimed the letter was fake.
Concerns intensified after Evergrande admitted that it did not pay some commercial paper on time and news in July that a Chinese court froze a $20 million bank deposit held by the firm on the request of Guangfa Bank.
Evergrande's fast expansion has been fuelled by loans to support its buying spree, and quickly selling apartments despite low margins so as to start the cycle again.
Its total liability, including revenues, is at 1.97 trillion yuan $306.3 billion or around 2% of the country's GDP.
Other than the traditional bank and bond channels, the developer has been criticised for tapping the commercial banking market, including trusts, wealth management products and shadow banking.
Evergrande accelerated its debt reduction efforts last year after regulators introduced caps on three debt ratios, dubbed the three red line policy. It aims at satisfying all requirements by the end of 2022.
Evergrande's buyers have given steep discounts for its commercial developments and sold the bulk of its residential properties. Since the second half of 2020, it has sold a $555 million secondary share sales, raising $1.8 billion by listing its property management unit in Hong Kong, while its EV unit sold a $3.4 billion stake to new investors.
On Tuesday, however, it said its property disposal plans have failed to make material progress.
In 2018 the Central Bank of China highlighted that companies such as Evergrande could pose systemic risks to the nation's financial system.
The leak of the letter from last year said Evergrande's liabilities involve more than 128 banks and 121 non-banking institutions. JPMorgan estimates last week that Evergrande has the highest exposure to China Minsheng Bank.
Late payments could trigger cross-defaults as many financial institutions have exposure to Evergrande through indirect loans and direct holdings via different financial instruments.
In the dollar bond market, Evergrande accounts for 4% of the US real estate high-yields, according to DBS. Any defaults will also trigger sell-offs in the high-yield credit market.
If Evergrande collapses will have a large impact on the job market, its investors will be affected. It hires 200,000 staff and hires 3.8 million people each year for project development.
Evergrande owns an office in Hong Kong's Wan Chai district. The city also has one undeveloped development in the city and two near-completed residential developments and a comprehensive undeveloped land parcel.
Outside Greater China, Evergrande has spent billions of dollars on acquisition stakes in foreign automobile technologies for its new energy vehicle business, including Swedish NEVS, Dutch e-Traction and British Protean.
It also set up a separate JV with Germany's Hofer AG, auto powertrain system developer, and supercar company Koenigsegg.
The China Banking and Insurance Commission and the People's Bank of China warned Evergrande in August that it needed to reduce its debt risk.
Media reports said regulators have approved an Evergrande proposal to renegotiate payment deadlines with banks and other creditors. The government of Guangzhou is also seeking opinions from Evergrande's major lenders about setting up a creditor committee.