Chinese property giant Evergrande, bête noire of Asian traders and fund managers, has re-emerged as a prominent risk to global markets, however, the problem never really went away after the onset of the crisis in late 2021.
The saga has taken an interesting turn, with the property developer’s founder being put under house arrest. Details are very scant, but Hui Ka Yan is accused of transferring assets offshore. The move by authorities also came after Evergrande walked away from creditor meetings, shelved restructuring plans for offshore debt, and (most egregiously) missed a repayment on its onshore debt.
The company has just announced that its offshore debt restructuring plan has failed to meet regulatory requirements. Non-China (offshore) bond holders are being kept in the dark and have not been provided with any documents or filings. Chinese regulators told Evergrande in September that it was not going to be allowed to issue new debt, as there is an ongoing investigation into its main unit. Evergrande is now regarded as the most heavily indebted property developer in the world.
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The failure to repay onshore debt could provide the best explanation for authorities’ heavy-handedness. While failing to meet obligations to overseas bondholders raises long-term credit and credibility risks, losses are borne by foreigners, whom the CCP has very little political and economic interest in protecting.
Immediate systemic risk for Chinese credit market
“Domestic bondholders are deeply embedded in the financial system as are Chinese investors; failing to honour obligations to them raises immediate systemic risks and the potential for blowback amongst a frustrated citizenry,” said Kyle Rodda, senior market analysts with Capital.com.
It was probably in response to the arrest of its founder that Evergrande went into a trading halt last week.
“Off the Golden Week public holiday, the share price surged, which could be a signal that the risks of a total collapse of the property developer have been allayed,” Rodda said. “However, it’s good to keep in mind that the stock has lost more than 99% of its value from its highs.”
So what happens next for Evergrande?
Evergrande needs to find some kind of restructuring solution that Chinese regulators will approve of. There is an increasing risk that Evergrande will be liquidated at the next winding up hearing, which is scheduled for 30 October. A Hong Kong court is due to hear the winding up petition. Much will depend on whether Chinese regulators are happy for the property developer to be broken up at that stage.
Without the proposed restructuring, there are growing worries that Evergrande will face an uncontrolled collapse. It currently faces an incredible USD 332 billion in liabilities, and thousands of homes around China remain unfinished.
Beyond the immediate issues faced by Evergrande offshore bond holders are the wider concerns about China’s property sector. The sector is seeing reduced demand and lack of credit. Families in China no longer see real estate as a safe place to park their wealth. If Evergrande collapses, and there is an increased risk of it this week, this could have a catastrophic impact on its competitors and lead to wider wealth destruction in China.
