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China is trying to reassure the Evergrande amid growing concerns about default

Beijing – China’s central bank expanded its loan supply on Monday as Beijing sought to reassure the public and investors in the event of a $ 310 billion debt collapse of a troubled real estate developer.

The Evergrande Group’s struggle to turn assets into cash has raised fears that defaults could cool the Chinese lending market and cause a global shock wave. Economists say the ruling Communist Party can prevent the credit crunch, but wants to avoid sending the wrong signal by bailing out Evergrande during a campaign to force companies to cut debt. Concerns are dangerously high.

The People’s Bank of China said it has released 1.2 trillion yuan ($ 190 billion) for loans by reducing the amount the banks have to reserve. Beijing was expected to show support for the loan after warning that cash could run out on Friday night, but the central bank did not mention the company, which had previously accused it of reckless borrowing.

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“The company must be punished,” said He Fan, an economist at Peking University’s HSBC Business School.

Developers have been competing to repay their debt since Beijing lowered its borrowing restrictions last year. Due to sluggish real estate activity, economic growth fell to 4.9%, an unexpectedly low compared to a year ago in the previous quarter.

The People’s Bank of China said, “We want to support the development of the real economy.” The reserve cut said it was not a “prudent monetary policy” change.

Iris Pan, an economist at ING, said that if Evergrande defaults, it will prevent home prices from plummeting if developers sell their apartments for “fire sale” to raise cash. He said he is likely to launch a two-track strategy of investing money in the credit market.

“If that happens, it will be a more semi-regulated market,” Pan said.

Chinese leaders have dealt with the corporate debt crisis, but nothing is as big as Evergrande.

The government in southern Hainan seized the airline HNA Group in 2020 after accumulating $ 61 billion in debt during a global acquisition. In September, the company proposed a plan to pay creditors about 40% of its debt.

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Chinese leaders have prioritized mitigating financial risk since 2018. In 2014, the Communists allowed the first bond defaults since they came to power in 1949. Defaults are gradually increasing in the hope of strengthening the discipline of borrowers and investors.

Nonetheless, total corporate, government and household debt increased from 270% of annual economic output in 2018 to nearly 300% last year, making it unusually high for a middle-income country. became.

Beijing last year reduced the amount of money real estate developers can borrow compared to their size. As a result, many will not be able to issue new debt to repay their bonds when they reach maturity.

Fantasia Holdings Group said on October 5 that it failed to pay $ 205.7 million for bondholders. Kaisa Group Holdings Ltd. warned last Tuesday that it may not be able to repay its $ 400 million bond on Tuesday.

Economic growth may sink further, but “the government believes that reforming the economic structure is more important,” he said at Peking University.

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The government of Guangdong Province, home of Evergrande, has announced that it will send risk managers to its headquarters in a city in southern Shenzhen. Other states and major cities have set up “risk mitigation teams”.

“There is no good news,” said the newspaper’s Economic Observer, a member of the risk team. He said the public was looking at the “only tip of the iceberg” of the Evergrande problem.

These problems are due to Evergrande’s “poor control and blind expansion,” the central bank said in an unusually stinging statement on Friday.

Regulators are also trying to eradicate the hidden real estate investment risk of insurers and banks.

Insurers were ordered to disclose investment details in November, business news magazine Caixin reported. Regulators have cited the possibility of “illegal funding,” but said they did not provide details.

Economists say Evergrande is not a “lehman moment.” This is a reference to the 2008 collapse of Wall Street bank Lehman Brothers, the symbolic beginning of the global crisis.

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Unlike banks and brokerage firms, whose assets are primarily billed to other financial institutions, Evergrande’s 2.3 trillion yuan ($ 350 billion) portfolio is stock of land, semi-finished apartments, and companies with market prices. ..

This means that Evergrande’s cash crunch “doesn’t hurt banks and insurance companies,” bank regulators said in a statement.

However, land is known as an illiquid asset or an asset that takes a long time to sell. The $ 2.6 billion sale of shares in the Evergrande subsidiary failed in October.

Under pressure from Beijing, Billionaire Chairman Xu Jiayin sold a $ 344 million Evergrande stake in November.

According to Caixin, Xu also borrowed $ 105 million and pledged two homes in Hong Kong’s Tony Blackslink district as collateral.

Evergrande said Friday that it was requested to pay $ 260 million in debt. Other obligations include the payment of $ 255 million in fixed income interest paid on December 28.

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These are a relatively small portion of total debt, but Evergrande warned on Friday that missed payments could result in immediate repayment of other debt. It can push the total to billions of dollars.

Evergrande avoided default by paying bondholders before the default was declared on the last day of the grace period. It is unknown where the money came from.

Meanwhile, other real estate companies are allowed to issue new debt, perhaps to reassure the public that the industry is healthy.

According to the China Securities News, the total amount of bonds sold by real estate companies in November was 47.1 billion yuan ($ 7.4 billion), up 84% from the previous month.

To support home sales, state-owned banks have speeded up the borrowing process for buyers and reduced costs, according to the Securities Daily newspaper.

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Contributed by AP researcher Yu Bing.

Copyright 2021 AP communication. all rights reserved. This material may not be published, broadcast, rewritten, or redistributed without permission.

China is trying to reassure the Evergrande amid growing concerns about default

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