Evergrande: foreign investors lose out in the company’s battle to survive
This suggests that the company’s priority is to reimburse Chinese investors first, if it can reimburse them. He is also under enormous pressure from Beijing to protect the people who bought his apartments and have not yet taken possession of them. China’s real estate sector and related industries are estimated to account for around 30% of GDP, and officials want to avert a wider crisis.
On Wednesday, Evergrande announced that it had agreed to sell part of its stake in a local bank to a state-owned company for nearly 10 billion yuan (about $ 1.5 billion).
In a stock exchange filing, the developer said its cash shortage had adversely affected Shengjing Bank’s operations “significantly” and that the lender demanded that all proceeds from the sale be used to resolve “financial liabilities.” between the two. parties.
Adam Slater, chief economist at Oxford Economics, said investors would keep an eye out for any developments, or even rumors.
“Global markets can still react,” he told CNN Business.
No sign of a ‘Lehman moment’
Evergrande is China’s most indebted developer, and its massive liabilities include nearly $ 20 billion in international bonds, according to data provider Refinitiv Eikon.
But because foreign lenders hold a “relatively small share” of Evergrande’s overall debt, their losses “will not be large enough to cause significant international contagion,” Slater said.
“Imposing losses on them frees up funds to compensate domestic creditors, suppliers [or] consumers, ”he added.
According to Slater, the scale of the potential damage to foreign creditors “seems manageable.” He estimated that they could ultimately lose around $ 15 billion, assuming the current bond price “accurately reflects the ultimate salvage value of Evergrande offshore bonds.”
“It’s not particularly important when it comes to corporate defaults,” he noted.
Slater said that while an Evergrande collapse would be significant, “it’s not a ‘Lehman moment’.”
The priority of the Chinese authorities “appears to be to prevent national contagion of Evergrande’s problems, in particular contagion that would harm consumers and suppliers,” he noted.
“Markets are assuming – probably rightly – that Chinese authorities will contain the impact of Evergrande’s financial difficulties.”
Beijing has few good choices, however. He will want to protect the many Chinese who bought unfinished apartments in Evergrande, as well as construction workers, suppliers and small investors.
According to a recent Bank of America analysis, Evergrande has sold 200,000 homes that have yet to be released to buyers.
The government will also want to limit the risk of bankruptcy of other real estate companies. At the same time, Beijing has long tried to curb excessive developer borrowing – and it won’t want to dilute that message.
China takes action to protect consumers
In recent weeks, the government has focused on limiting the fallout from the crisis and protecting ordinary people, although it has refrained from directly commenting on Evergrande.
In a statement released at the end of last month, the People’s Bank of China pledged to “maintain the healthy development of the real estate market and protect the rights and legitimate interests of housing consumers.”
While not specifically referring to Evergrande, the central bank has injected liquidity into the financial system over the past few days to help stabilize the situation and calm nerves.
On Tuesday, he announced that he had added 100 billion yuan (about $ 15.5 billion) to the system, claiming it was to maintain liquidity.
Iris Pang, chief Greater China economist at ING, said the move was “a symbolic signal to the market, that the Chinese government is in control of the incident and not letting the incident turn into a crisis.”
But even if losses to foreign investors are relatively contained, the crisis could force some to rethink how they lend to other Chinese companies in the future, according to Slater.
He warned that lenders could ‘decide to’ re-price ‘China [risks] in light of their treatment in the restructuring of Evergrande, and in light of what Evergrande’s problems tell them about the broader risk / return trade-off of Chinese debt. “
“Much in turn depends on how exactly the restructuring of Evergrande is organized,” he added.
– Laura from CNN He contributed to this report.