Mon, October 18, 2021

international

China told Evergrande to meet obligations


BEIJING - Regulators in China are said to have instructed developer Evergrande Group to focus on completing unfinished properties and repaying investors while avoiding a near-term default.

But it offered no financial support to the company which has yet to pay US$83.5 million (S$112.5 million) in bond interest due on Thursday (Sept 24).

The world's most indebted developer now has 30 days to pay the amount.

In a recent meeting, the regulators also told company representatives that Evergrande should communicate proactively with bond holders to avoid a default, Bloomberg reported yesterday, citing a source.

"There's no indication that regulators offered financial support to Evergrande for the bond payment, and it's unclear whether officials believe the company should eventually impose losses on offshore creditors," the news outlet added.

Separately, the Wall Street Journal reported on Thursday that the Chinese authorities were asking local governments to prepare for the potential downfall of Evergrande.

Citing officials familiar with the discussions, the report said local governments have been ordered to assemble accountants and legal experts to examine the finances around Evergrande's operations in their respective regions.

They have also been told to get local state-owned and private property developers to prepare to take over projects and set up law enforcement teams to monitor public anger and so-called mass incidents, a euphemism for protests, the report added.

Evergrande had not issued any statement as at last night. But its chairman and founder Hui Ka Yan stressed in an internal meeting late on Wednesday night the importance of resuming construction on its stalled projects, and to be responsible towards helping wealth investors redeem their products.

BlackRock, UBS Group, HSBC Holdings and Ashmore Group, a London-based money manager that specialises in buying emerging market debt, are among the biggest holders of Evergrande's bonds, according to Bloomberg.

Evergrande, China's second-largest developer, has been struggling to stay afloat amid liabilities of more than 1.97 trillion yuan (S$411 billion) as at June 30.

Analysts told The Straits Times that the cloud of uncertainty hanging over Evergrande's viability has become darker, given that it also has to pay another US$47.5 million due on other offshore bonds next Wednesday.

"With time having run out for Evergrande, an imminent default followed by a long, painful restructuring is the most likely way forward," said Dr Zafar Momin, an MBA lecturer at the Nanyang Business School.

Global markets are on tenterhooks as there are fears that Evergrande's debt crisis could pose systemic risks to China's financial system. Investors also worry that the impact will hit creditors abroad.

Chinese regulators' public silence so far on Evergrande's problems has increased contagion risk to financial markets, said Dr Tommy Wu, lead economist at Oxford Economics, in a note.

Professor Mak Yuen Teen at the National University of Singapore Business School said the People's Bank Of China is closely monitoring the situation by injecting liquidity into its banking system to avoid a squeeze on funding and meet a seasonal demand increase for financing.

"It's unlikely that there will be a bailout (but Evergrande) will probably reach an agreement with bond holders (on repayments). It would not be in anyone's interest to push it into bankruptcy," he added.

Even if Beijing does come up with a rescue plan, regulators are expected to orchestrate the restructuring as inconspicuously as they can.

"The government would not want to be seen as bailing out the firm or its corporate creditors" amid its campaign to reduce moral hazard, Dr Wu said, referring to how high-flying firms have been borrowing and splurging and counting on the government to bail them out if they default.

Evergrande has been trying to rein in its ballooning debt since last year when Beijing introduced curbs on highly leveraged developers that had been borrowing to fuel their growth.

"Borrowing for large Chinese companies like Evergrande had never been a problem in the past," said Professor Michael Pettis at Peking University's Guanghua School of Management.

"Local governments and regulators were always expected to step in at the last minute to restructure liabilities and recapitalise the borrower if necessary," he added in a think-tank report on Monday.

The company said last Saturday that it has begun repaying investors in its wealth management products with real estate.

These products rode on Evergrande's reputation as one of China's "too big to fail" firms, and attracted more than 70,000 retail investors with promises of up to 12 per cent in annual yield rates.

Prof Mak said: "The Chinese government will be particularly sensitive about the impact of (an Evergrande restructuring) on ordinary citizens... and would probably look to protect the interests of the man in the street as a priority."

Local suppliers and contractors are likely to be next in line, followed by Chinese banks and other Chinese creditors, "with external-currency creditors probably bringing up the rear", Prof Pettis said.

 

By Aw Cheng Wei/The Straits Times

Published : September 24, 2021