HONG KONG (Reuters) – Beijing has avoided intervening too directly to support the promoter China Evergrande Group, which has fallen from Charybdis to Scylla in the last two years, and until recently considered too systemic to fail.

As the world’s most indebted developer now finds itself on the precipice after the opening of a criminal investigation into its billionaire founder, some creditors, investors and analysts are now betting that the government will intervene to limit the scale of the crisis .

A disorderly collapse of the real estate giant could shake an already struggling economy, with hundreds of thousands of unfinished homes across the country and liabilities of around $300 billion in China alone.

Although a growing number of Chinese real estate developers have defaulted on payments since the liquidity crisis hit the sector in 2021, Beijing has not directly intervened to bail out a company so far.

Prospects for the adoption of Evergrande’s offshore debt restructuring plan, essential to its survival, have been clouded by the investigation into the group’s founder and chairman Hui Ka Yan.

The investigation suggests that debt restructuring efforts led by Hui were rejected by the central government, which will now step in to take control and formulate new plans, said Xin Sun, a senior lecturer on China and l East Asia at King’s College London.

“The investigation into Hui clearly shows that Chinese decision-makers prioritize political considerations over economic considerations in their relations with Evergrande,” he explains.

“Politically, the government must ensure that the company and its owners pay for causing China’s property crisis and are duly punished. Any restructuring can only take place once this assumed political responsibility.”

According to a report by macroeconomic research firm Gavekal Dragonomics, Evergrande has contractual commitments – payments made in advance by home buyers – amounting to 604 billion yuan (74 billion euros), which is equivalent to around 600,000 homes.

Beijing has made the completion and delivery of these units a top priority as the proliferation of unfinished apartments across the country sparked nationwide protests last year.

“The government’s priority will clearly be to deliver unsold and unfinished housing to buyers,” summarizes Christopher Beddor, deputy director of China research at Gavekal Dragonomics, referring to the Evergrande situation.

“It is not necessary for the government to formally take control of the company, or even impose a shareholder in its control, to exert massive influence over the decisions of the company or for the entire sector is not nationalized.

Evergrande and China’s housing regulator did not immediately respond to requests for comment, made during the National Day holiday week.

RESTRUCTURING OF EVERGRANDE

Even before the investigation into Hui was made public, the restructuring plan was complicated by news that Evergrande would be unable to issue new debt due to an investigation into its main Chinese unit.

Late last month, Evergrande also said it needed to reevaluate the terms of the proposed restructuring because housing sales were not meeting expectations.

“Issuing new securities is an essential part of any restructuring, and I don’t know how you can do it without that,” said Sandra Chow, co-head of Asia-Pacific research at CreditSights.

In his report, Gavekal says an orderly restructuring of Evergrande appears increasingly difficult to achieve. A liquidation petition filed against Evergrande is due to be heard by a Hong Kong court on October 30.

A source close to Evergrande said the debt restructuring would be delayed, but could still take place with the help of a government-appointed risk management committee.

A risk management committee was set up in December, including representatives from state-owned companies, to help with debt and asset restructuring.

An Evergrande bondholder, however, said restructuring efforts would be undermined by the investigation into Hui and the developer could face liquidation even after government intervention.

But nothing is yet clear about how potentially one of the largest liquidations in the world will unfold and what will happen to creditors, particularly foreign ones, suppliers and buyers who are awaiting delivery of the apartments.

With total liabilities of $327 billion at the end of June, Evergrande sought approval from its creditors to restructure $31.7 billion of offshore debt.

Due to the scale of this debt, deteriorating cash flow, and large volumes of unfinished projects, some analysts question whether Evergrande has gone from being too systemic to fail to being too systemic to fail. complicated to survive.

“Evergrande is of such importance that its collapse must be managed, partly because of its size, (and) partly because of the expectations of the different actors,” notes Antonio Fatas, professor of economics at INSEAD.

In China, “because of the political-economic system and the great interference of the government and state-owned enterprises, the political question of how to share the losses associated with events like this will always arise.”

(Reporting Xie Yu, Clare Jim, additional reporting Kane Wu, editorial Sumeet Chatterjee, Corentin Chappron, editing by Blandine Hénault)

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