Tipping point?

Xu Jiayin: Evergrande’s founder

The advice from Alcoholics Anonymous is that admitting you have a problem is the first step towards recovery. Evergrande, one of China’s biggest home builders, is battling a different addiction, after admitting for the first time that it will default on its debt if it doesn’t raise cash – and quickly.

Coming clean last week hasn’t helped the company much, it seems. Trading in Evergrande’s bonds was halted twice since, including suspension of a May 2023 bond in Shenzhen on Tuesday after “abnormal fluctuations” in pricing. It then fell more than a fifth after the halt came to an end.

The pressure is building elsewhere, with Evergrande’s Hong Kong-listed shares tumbling again as part of a total decline of about 75% so far this year. At one point it dropped below its offering price in Hong Kong in 2009.

Bloomberg reckons that at least two trust companies – aggregators of loans from wealthy investors – are insisting on immediate repayment, while financial intelligence provider REDD reported new rumours on Wednesday that the developer will suspend interest payments on loans to two banks later this month.

On a positive note, there are reports that regulators have stepped in and asked creditors to give more breathing time to Evergrande in repaying its debts or interest.

Evergrande’s financial prospects have been perilous for months, prompting a series of downgrades from credit rating agencies. The uncertainty is unsettling the wider market: yields on China’s dollar junk bonds, which are dominated by property firms, have climbed to their highest levels since March last year, with fellow developers Fantasia Group and Guangzhou R&F coming under the greatest selling pressure.

Barred from refinancing, Evergrande is scrambling to raise cash from asset sales. There’s talk of a deal to sell its Hong Kong headquarters and it has been hawking around its stakes in its electric-vehicle and property services units, both of which are listed in Hong Kong. So far there have been no takers for either – less of a surprise in the case of its EV unit, perhaps, which hasn’t sold a single car.

The dash for cash is forcing some frantic disposals of its projects, as it drops its prices on existing and soon-to-be-finished apartments. Despite reported discounts of at least 10%, contracted sales still dropped more than a quarter in August compared to a year earlier, according to a company filing last week.

A story in Caixin magazine gives a sense of the desperate situation in which Evergrande finds itself, with Skshu Paint, one of its many unpaid suppliers, agreeing to take ownership of three yet-to-be-completed apartment projects in part-payment of an overdue loan. Evergrande is still Rmb100 million ($16 million) short on the repayment, Caixin says, and it owes a further Rmb562 million in another debt to the paint firm (see WiC542).

Skshu has started to cash out some of these properties by selling them, it says, and the broader question is whether a fuller round of fire sales from the failing developer could trigger a wider decline in home prices. Major cities are already reporting a slowdown in the sector.

Of course, some of the deceleration has been engineered by policymakers responding to President Xi Jinping’s mantra that “housing is for living, not for speculation”, with worries that sky-high prices are putting too much financial pressure on urban families. Rules on mortgage approvals and lending rates have been tightened; banks are reducing their share of loans to homebuyers; and central government officials are even flagging the launch of a national property tax again, which is putting off some buyers.

Property loans rose at their slowest pace in eight years in the first seven months of the year but while the government won’t mind a pullback in prices in the most expensive cities, it will be wary of more dramatic declines in home values.

Some cities are already reported to be setting floors on sales prices in a bid to prevent values falling too far, for instance, with a broker from a Fujian-based agency telling Times Weekly that officials in third- and fourth-tier cities are the most alarmed. Developers in financial trouble are offering substantial reductions, he added, forcing city governments to set 10-15% limits on discounts for new flats.

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