Explained: How the crisis at China’s Evergrande is worsening

The trouble at China’s real firm Evergrande seems to be getting worse. The company on Monday missed yet another bond payment – a development sure to send chills through China’s crisis-hit property sector. The development comes amid reports that Evergrande founder Xu Jiayin, also known as Hui Ka Yan in Cantonese, was taken away by authorities earlier this month and is under surveillance. But what happened exactly? And what happens next?  Let’s take a closer look:  What happened? First, let’s take a brief look at Evergrande. The company, with an estimated debt of $328 billion at the end of June, is the world’s most indebted property developer. It has been at the centre of an unprecedented liquidity crisis in China’s property sector – a key pillar of the country’s growth which has experienced a dazzling boom in recent decades – which accounts for roughly a quarter of the world’s second-largest economy. Once China’s top-selling developer, Evergrande’s financial crisis became public in 2021 and since then it and a string of its peers have defaulted on their offshore debt obligations amid slowing home sales and fewer new avenues for fundraising. This after authorities in 2020 gradually tightened developers’ access to credit. Evergrande has since been attempting to restructure its massive $31 billion offshore debt by getting approval from its creditors amid weakening cash flows.

The debt includes bonds, collateral, and repurchase obligations.

Under the plan, Evergrande proposed various options to offshore creditors in March including swapping some of their debt holdings into new bonds with maturities of 10 to 12 years. Creditors were offered choices to swap their debt into new notes issued by the company and equities in two subsidiaries, Evergrande Property Services Group and Evergrande New Energy Vehicle Group, according to the term sheets made public in a Hong Kong exchange filing. But a weekend announcement it could not issue new debt due to a regulatory investigation underway into one of its main Chinese units has thrown those plans into disarray. CNN quoted an Evergrande filing on the Shenzhen Stock Exchange as stating that Hengda Real Estate – its main domestic subsidiary in mainland China – missed its principal and interest payments on a bond. This came just a day after Evergrande announced it is unable to issue new debt due to an ongoing investigation into Hengda. The company just days earlier said meetings on the restructuring scheduled for Monday and Tuesday would not take place, saying it was “necessary to reassess the terms” of the plan in order to suit the “objective situation and the demand of the creditors”. Hengda said last month it was being investigated by China’s securities regulator for a suspected violation over the disclosure of information. This, as Bloomberg reported that Hui was placed under residential surveillance. [caption id=“attachment_12023172” align=“alignnone” width=“640”] Xu Jiayin, also known as Hui Ka Yan, was at the top of the world in 2017. AFP[/caption] The report added that the move is a type of police action that falls short of formal detention or arrest and does not mean Hui will be charged with a crime. The report comes  just a week after police detained some staff at its wealth management unit. A statement by the Shenzhen police on said authorities “took criminal coercive measures against suspects including Du and others in the financial wealth management (Shenzhen) company under Evergrande Group.” The statement called on the public to report any cases of suspected fraud to the authorities. Media reports about investors’ protests at the Evergrande headquarters in Shenzhen in 2021 had listed a person called Du Liang as head of the company’s wealth management unit.  What happens next? The company’s future is uncertain. “Hopes of any meaningful recovery for the Evergrande debt holder are vanishing,” said Fern Wang, KT Capital Group senior researcher, who publishes on Smartkarma. “Yet liquidation is not in the cards for Evergrande, the government’s number one priority is to ensure the timely delivery of pre-sold homes and Evergrande’s liquidation would not help the cause,” Wang added. “This will entail more delays, but I wouldn’t say that Evergrande’s restructuring proposal is now dead in the water,” said Sandra Chow, CreditSight co-head of Asia Pacific research, referring to the developer’s inability to offer new notes.

But if Evergrande defaults, many people will be impacted.

As per Euronews, Evergrande has offices in 200 cities across China and employs at least 100,000 people. Several institutions also have exposure to Evergrande via loans and holdings. Around 70 per cent of the Chinese public invest in real estate. A default could hurt already sagging domestic consumption. A Shanghai-based holder of Evergrande’s yuan-denominated bonds said the news that Hui had been put under police watch was not a surprise given the company’s massive problems. The focus will now be on whether the government will rescue Evergrande and how much Hui personally would pay to creditors, said the bondholder, also declining to be identified due to the sensitivity of the matter. “We are now just resigned to our fate.” The police actions against Evergrande indicate that Hui may not remain at the helm of the company for very long, but it is unclear who he would be replaced with, or whether the government will play any role in running the company. The 65-year-old chairman was once China’s richest man, with a taste for luxury labels and yachts, and a nose for praising the Communist Party that steered the economy to a home-ownership boom. Hui’s wealth is now estimated at $1.8 billion – down from $42 billion in 2017 – according to the Bloomberg Billionaires Index. Another Chinese property giant, Country Garden, has narrowly avoided default in recent months, after reporting a record loss and debts of more than $150 billion. State-backed developer Sino-Ocean on Friday announced it would suspend payments of offshore debts, the latest company to show signs of trouble. Meanwhile, the Moody’s rating agency has downgraded the outlook for China’s property sector from “stable” to “negative,” arguing that the government support measures will have only a short-term impact. [caption id=“attachment_13177242” align=“alignnone” width=“640”] Construction workers smoke outside of a construction site in the central business district in Beijing. Reuters[/caption] “The fall of industry stalwarts in China’s property space has been alarming, to say the least,” said Fiona Kwok, Asian Fixed Income portfolio manager, First Sentier Investors. “Until Chinese regulators come through with stimulus significant enough to inject optimism into the property market and increase property sales, default risk remains high among private and mixed ownership developers.” In November, China’s banking regulator and central bank issued new measures to promote the “stable and healthy development” of the real estate industry. They include credit support for indebted developers, financial support to ensure projects are completed and assistance for deferred-payment loans for homebuyers. Observers fear global spillover Some fear a real estate crisis in China may further slow the world’s second-largest economy and spill over globally. Tao Wang, chief China economist and head of Asia Economics at UBS, speaking to CNN, said “Investors will be watching closely China’s property market, whether it can stabilize soon and [its] implications for global commodities demand and prices.” Stephen Innes, managing partner of SPI Asset Management, added that it brings into focus questions about China’s economic stability. “It has reignited concerns that the country’s housing sector is still deteriorating rather than showing signs of improvement and that financial stability risks are rising,” Innes said. A major group of Evergrande offshore bondholders plans to join a liquidation petition due to be heard in a Hong Kong on 30 October unless Evergrande can present a new restructuring plan before then. In July, the hearing for a winding-up petition against Evergrande in a Hong Kong court was adjourned to 30 October in order to wait for the result from the developer’s meeting with creditors to vote on its debt restructuring plan. That meeting is scheduled for mid-October. However, the latest disclosure by Evergrande puts the meeting, as well as its outcome, in doubt. It is not clear if the developer will come up with a new proposal to replace the offering of new notes. Evergrande needs approval from more than 75 per cent of the holders of each debt class to approve the plan. The company also filed for Chapter 15 bankruptcy in a US court in August.  With inputs from agencies