Evergrande shares slump before new debt payment deadline

China’s Evergrande group, the world’s most indebted real estate developer, was once again flirting with a formal moratorium on Monday (6), while the 30-day deadline for repaying its US$ debts 82.5 million (R$ 469 million) is approaching.

The group’s shares plunged nearly 20% in the first deal since Evergrande revealed it would have difficulty meeting a $260 million (BRL 1.47 billion) obligation and that its chairman, Hui Ka Yan, had been called in by the regulators.

Evergrande also said it had formed a new risk management committee with members from large state-controlled companies.

The company’s shares traded in Hong Kong were down 19.6% from the close on Friday to hit Hong Kong dollar 1.81 ($1.31), its all-time low.

In a statement Monday night, Evergrande said the new committee “would have an important role in mitigating and eliminating the group’s future risks.” The group, led by Hui Ka Yan, includes representatives from state-owned companies controlled by the central and Guangdong provinces, such as China Cinda Asset Management.

Liu Zhihong, senior executive of Guangdong Holdings, will serve as co-chair of the committee. Analysts expect a restructuring of Evergrande to include state-owned companies that could take over many of its real estate projects.

Evergrande added that “the features [que os membros do comitê] will be able to use will be beneficial to the group to overcome the challenges it faces today.”

China’s regulators have tried to reassure domestic and international investors that they can contain Evergrande’s side effects. The central bank said that after markets close it would help release the equivalent of $188 billion (more than R$1 trillion) in liquidity to the banking system, cutting the percentage of deposits that financial institutions must hold in reserve on 50 basis points, adding monetary stimulus to the slowing economy.

While the People’s Bank of China has said it will not “flood” the economy with stimulus, the governing body of the Chinese Communist Party has pledged to maintain a proactive fiscal policy and a “flexible” monetary policy next year, according to state media.

Chaoping Zhu, a strategist at JPMorgan Asset Management, said the cut reflects the government’s desire to “strike a balance between short-term stability and longer-term reforms.”

Evergrande said on Friday it had received a demand for a $260 million (£1.5 trillion) guarantee it had issued. She did not say what it was related to or give further details, but warned that failing to meet the guarantee “could lead creditors to demand acceleration of payment” on other debts.

It was not immediately clear whether the guarantee had previously been disclosed by Evergrande, or when it would expire.

In August, Evergrande said it had issued tax guarantees on behalf of property buyers and business partners totaling $87.4 billion (BRL 497.3 billion).

Evergrande, whose debt crisis began to spiral out of control in September, has at least four bond payments totaling $610 million due by the end of February. The two largest, at US$255 million (R$1.45 billion) and US$235 million (R$1.33 billion), will mature on December 28 and January 24, respectively. A 30-day grace period on coupon payments of $82.5 million (BRL 469 billion) is expected to expire on Monday (13).

In September, the Shenzhen-based construction company was forced to restructure repayments for retail customers who had purchased its high-yield investment products. She also offered to pay investors and suppliers with finished apartments instead of cash.

Evergrande later missed the initial bond payment deadlines, but in each case managed to meet its obligations before the end of subsequent grace periods, avoiding a formal default.

Shortly after Evergrande’s statement on Friday, China’s central bank reiterated its earlier criticisms of the company’s management, accusing it of “mismanagement” and of pursuing “blind expansion.”
In addition to summoning Hui on Friday, the Guangdong provincial government also sent a team to the group’s headquarters to oversee its finances. Hui’s fortune has dropped more than 70% in the last year, reaching US$11 billion (R$62.59 billion).

Property prices in many of China’s big cities have plateaued or fallen in recent months — a fact appreciated by officials now in charge of implementing President Xi Jinping’s new “common prosperity” policy agenda aimed at reducing social inequality.

But with China’s real estate sector valued at up to a third of total economic output, there is growing concern that the world’s second-largest economy could grow by less than 5% next year.
Demand for urban land has fallen sharply, threatening a critical revenue stream for local governments that are also struggling to finance growth-promoting infrastructure investment.

“The biggest obstacle to growth will be the housing recession,” said Larry Hu, chief China economist at Macquarie. “The real estate stumbling blocks represent a significant contagion for the Chinese economy.”

The Chinese Communist Party is expected to hold its annual economic planning meeting in the coming weeks. Politicians are expected to endorse some measures that will moderately bolster growth, but they will also continue to strictly police the leverage limits imposed on contractors last year.

(Collaborating Xinning Liu in Beijing)
​
Translated by Luiz Roberto M. Gonçalves