Shares in beleaguered Chinese property developer, China Evergrande (HKG:3333), plunged further on Monday. Evergrande’s share price is now down to 2.28 HKD, a drop of over 80% from its high of 19.60HKD in October 2020.
And with Fitch Ratings downgrading the Group to ‘CC’ from ‘CCC+’ and indicating that a default of some kind is probable, many investors in China are concerned they won’t get their money back. No wonder then that there have been protests outside the Evergrande headquarters in Shenzhen.
What has happened to Evergrande?
Evergrande Real Estate which is just one part of the group, owns more than 1,300 projects in more than 280 cities. It also owns a wealth management company, an internet streaming service, a property services company, a mineral water company and makes electric cars. It is also building a set of theme parks and is developing the Ocean Flower Island, an artificial archipelago in Hainan province.
This year, Evergrande has been undergoing a significant deleveraging program as part of the China-wide state effort to cut its debt – tightening funding conditions for a number of developers including Evergrande. At the end of March, the group announced that it had significantly decreased its interest-bearing debt by Rmb200 billion from Rmb874.3 billion to Rmb674 billion.
However, On 25 August, Evergrande issued a profit warning with the expectation that profits would be up to 40% lower than last year. The board cited lower selling prices of properties and an increase in expenses in the first half of 2021. By mid-September, Evergrande had announced that it expected a continuing decline in sales and that to ease the liquidity issues, it was looking to sell part of its interests in China Evergrande New Energy Vehicle Group (HKG:708) and Evergrande Property Services Group (HKG:6666).
Evergrande liquidity crisis
With debts believed to be around $300bn, including USD129 million due later this month and a total of $850m in interest payments due before the end of 2021, this liquidity crisis won’t be going away anytime soon. Pundits are suggesting that this could be another Lehman-type situation. Fitch has stated however, that if Evergrande defaults it would reinforce credit polarisation among homebuilders and could result in headwinds for some smaller banks, the overall impact on the banking sector in China would be manageable.
Nevertheless, the markets have reacted. Hong Kong’s Hang Seng Index fell 3.3% to 24,099.69 on Monday and is down nearly 7% in the last 5 days. In the last six months, the HSI has fallen just over 12%. The Hang Seng Properties Index has taken more of a beating and was down 6.69% on Monday to 27,156.15 and in the last 5 days is down just over 13%.
Meanwhile the S&P 500 was down 1.7% on Monday and Japan’s Topix is also down 1.7% at time of writing on Tuesday. STOXX Europe 600 has dropped over 5% in the last 5 days. Already, the price of iron ore which is used for steel has dropped 20% in recent days, although this is partly due to the slowing Chinese economy. It is worth noting that yesterday the FTSE 100 dropped 1.8% from 6963.64 to 6833.84 but finished the day at 6908.48 and at time of writing is 6971.81.
How far this will go, only time will tell. But while few of us outside China have heard of Evergrande, with the likes of HSBC and UBS as bondholders according to Morningstar, and Vanguard, Blackrock and Invesco equity shareholders too, global markets are in for a bumpy ride.