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Financial Crash Fears as $24bn now at Risk while Evergrande Restructures

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Evergrande

With over 1,300 real estate developments, China’s Evergrande is one of the biggest businesses in the world. Started two decades ago by the billionaire owner, Hui Ka Yan, Evergrande has made Hui the second richest man in China.

However, recent events have signalled a significant downfall for the real estate empire. $300 billion worth of liabilities hangs over the company’s head, making it unable to repay many of its investors. And that is the least of the problems facing the Chinese property giant. Additionally, Evergrande’s shares have hit their lowest point since it debuted in November 2009.

The Omicron variant of the coronavirus already has global investors feeling extremely nervous. If Evergrande’s inability to repay its debts devolves into a default situation, it will shatter investor confidence. Global markets would be detrimentally affected, and alarm bells would ring out through the Chinese commercial real estate market.

On five separate occasions, Evergrande has failed to make repayments for bond interest, according to Dr Marco Metzler, a senior analyst at Deutsche Markt Screening Agentur (DMSA). The company owes a total of $82.5 million and is facing repayments of $19.8 billion and $18.5 billion in quarters one and two of 2022, respectively. November was a dismal month in terms of sales, so there wasn’t even any recent revenue to partially cover the company’s debts.

Evergrande enjoys the hospitality of the southern province of Guangdong, which has indicated that it will not be giving the property company a bailout as it has in the past. The Communist Party wants it to be crystal clear that it will not tolerate levels of debt that will lead to nationwide financial instability.

So, instead of a fiscal bailout, the Chinese authorities have offered assistance in the form of a committee. The elimination of risk at the company will be the committee’s sole goal. Additionally, this committee will help Evergrande with its daily operations and help the company to keep a tight rein on internal controls.

According to Steven Leung, UOB Kay Hian director, Guangdong’s involvement in the Evergrande issue has markets waiting with bated breath. Tiger Faith Asset Management’s Conita Hung is less ambiguous about what the government’s involvement means, calling it “a very bad signal.”

50% of dollar-denominated debt emanates from China so, it is no surprise that markets are keeping a close eye on Evergrande’s activities. The company’s performance will have ramifications – both at home and abroad. In the US, for example, the Federal Reserve has already issued a warning that the state of China’s commercial property market could directly impact the American context.

At home, Evergrande’s $300 billion worth of liabilities has put the company at the epicentre of China’s worst real estate predicament. For the first time in six years, the Chinese property market experienced a dramatic fall in housing prices. Nearly three-quarters of the nation’s wealth lies in real estate. Naturally, Beijing is doing its utmost to prevent a similar drop from occurring in other parts of the real estate industry.

But despite their best efforts, the drama of Hui’s property empire has spread to many smaller companies within the same sector. Kaisa Group Holdings Ltd., for example, has experienced hikes in borrowing costs. Kaisa’s forte is the issuing of dollar bonds. This must have made it especially painful when the company was recently suspended from stock trading. Another firm, China Aoyuan Group Ltd., has also had to default on its debt.

The imminent default and debt-restructuring of Evergrande have already impacted companies within and outside of China. The company’s inability to repay bonds will, potentially, cause the global economy to crash. It will certainly negatively affect bondholders outside of China. Putting investment funds in securities within UK investment ISA is one good way to protect finances in situations like this.

‘Containment’ seems to be the watchword considering everything occurring with Evergrande. The People’s Bank of China stated that it could contain the worst of Evergrande’s economic fallout. Additionally, the provincial government of Guangdong realistically acknowledges that the company could potentially become the largest default in the country. To prevent this from occurring, the government no longer wants to coddle Evergrande with bailouts as it has before. Instead, in a bid to stop the company’s bad fiscal juju from spreading too far, Guangdong wants to contain Evergrande’s activities.

While this move has undoubtedly benefited players in China’s offshore credit market, not everyone has found containment to be enjoyable. For developers who depend on foreign funding to complete their projects, it is simply not good enough. These developers need a lot more than containment efforts to repay their investors.

Hui Ka Yan stands to lose the most in the fallout from Evergrande’s debt calamity. Hui used to own 70% of the company, but sales of company stock have cost the founder roughly $17 billion of his considerable wealth. His ranking on the Bloomberg Billionaires Index has slid from number two to number 75.

 

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