China Evergrande’s Snowballing Debt Crisis

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China Evergrande’s Snowballing Debt Crisis
An exterior view of China Evergrande Centre in Hong Kong, China, on March 26, 2018. (Bobby Yip/Reuters)

SHANGHAI (Xinhua) —Analysts say the Evergrande Group’s inability to quickly sell assets and avoid default on its $305.3 billion in liabilities raises the risk of contagion for other privately-owned developers and fund managers.

Concerns about China’s second-largest property developer’s ability to make bank loan interest and wealth management product payments have resulted in a worsening sell-off in its bonds and shares over the last week.

Evergrande’s offshore bonds have fallen to less than a quarter of their face value, trading in its onshore bonds has been halted, and a stock price rout has deepened, wiping out more than three-quarters of the company’s market capitalization this year.

“Telling property guys to de-leverage so quickly is like telling a 900-pound guy to lose 100 pounds,” said a fixed income asset manager who declined to be identified due to the sensitive nature of the issue.

“It will be the process of losing so much weight [so quickly] that kills him, not the obesity.”

Evergrande is one of the world’s largest emerging market issuers of dollar debt, with approximately $20 billion in outstanding offshore bonds, and the company’s woes have driven an index of Chinese high-yield dollar issuers to 16-month lows.

According to S&P Global Ratings, bond market volatility will exacerbate some developers’ efforts to refinance, and its rated developers are expected to repay approximately $74.4 billion in onshore and offshore maturities over the next year.

Guangzhou R & F Properties Co., Ltd. and Xinyuan Real Estate Co., Ltd., both privately held developers, were downgraded this month due to concerns about their ability to repay debts, and bond yields have risen above 30 percent, indicating a lack of market funding.

Evergrande pledged on Friday to repay all of its matured wealth management products as soon as possible, boosting its dollar bonds, but analysts predict more difficulties ahead.

“The property sector is under pressure, and some developers are on the verge of going bankrupt… According to Larry Hu, economist at Macquarie Capital in Hong Kong, the bond market is reflecting that reality. “In the coming months, we will see more developers go bankrupt.”

Evergrande’s debt woes come after years of aggressive expansion, and coincide with a sweeping clean-up of the property market that has formed a key pillar of Beijing’s new “Common Prosperity” campaign, which many observers see as a return to China’s socialist roots.

While private homebuilders struggle, steady onshore credit spreads indicate that Chinese investors are unconcerned about risks spreading into the broader banking system for the time being.

“Contagion from Evergrande to other developers will be more visible for high-yield and private debtors.” In terms of bond prices, the impact on state-owned developers and banks is limited, according to Natixis economists.

On Monday, the February 2023 dollar bonds of state-owned developer Poly Developments and Holdings Group Co., Ltd. were trading at a nearly 3% premium to their face value, yielding 1.78 percent.

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