Chinese real estate developer Evergrande did not make the key interest payment on Thursday, a move that could have serious repercussions for the Chinese economy and the global financial system.
There is still a 30-day grace period for the repayment, with investors unsure whether Beijing will rescue the real estate giant in a bid to avoid financial disruption. A bailout seems unlikely, however, as the government pretends to want companies to curb their debt.
Chinese officials have reportedly asked China Evergrande Group, the country’s second-largest real estate developer, to avoid a short-term default on its dollar bonds while telling local governments to prepare in case the real estate giant s ‘would collapse on Thursday.
Uncertainty caused Evergrande shares to fall 6% at the start of trading, the Reuters news agency tweeted.
At the same time, Chinese banks have tried to allay investor fears by revealing the amount owed by Evergrande.
How much does Evergrande owe?
Bloomberg Law reports that Chinese regulators have asked Evergrande to avoid a short-term default on its dollar bonds and the nearly $ 83.5 million (€ 71.1 million) in interest payments on the dollar bonds due Thursday. At a time, The Wall Street Journal reported that the central government is alerting local governments that the real estate giant may collapse.
The payments that were due Thursday are for a $ 2 billion offshore bond and a $ 47.5 million bond. Evergrande’s bonds would default if the company does not pay the interest it owes within 30 days.
In total, the company owes $ 305 billion over the next two years. Bloomberg reports that Evergrande has stopped paying staff and factory suppliers for its electric vehicle unit.
In Hong Kong, however, Evergrande shares rose 18% after news that the real estate conglomerate would manage to pay bondholders in China, without saying whether it would satisfy foreign creditors.
The Evergrande crisis has its roots in the 1994 reforms that helped increase central government coffers but made local authorities dependent on land finance for their income, Professor Alfred Wu told Reuters news agency. associate at the Lee Kuan Yew School of Public Policy in Singapore.
“Evergrande is a cash cow for regional governments. If the company goes bankrupt, the land finance model and regional governments will also go bankrupt. The central government will not allow it,” Wu said.
What insolvency for Evergrande could mean
Uncertainty over Evergrande’s ability to honor debts signals the end of an era of freewheeling construction with borrowed money. The real estate boom has fueled China’s physical transformation.
The downside risks to the Chinese real estate market are considerable. The real estate market represents a quarter of Chinese GDP.
Tang Renwu, who heads the School of Public Administration at Peking Normal University, told Reuters news agency that the Chinese government knows that letting Evergrande go bankrupt could have serious consequences.
“Disgruntled owners and shareholders could cause social instability, defaults could lead to financial risk, massive layoffs could exacerbate employment problems and private companies could be even more frightened,” he said.
A default on interest payments by holders of foreign bonds risks stifling macroeconomic growth if foreign investors believe they have suffered a discount to the detriment of Chinese investors.
Analysts including Jerome Powell of the US Federal Reserve believe the fallout would largely be limited to China, arguing he saw no parallel with the US corporate sector, for example.
A handful of real estate developers in China have already seen their ratings downgraded by agencies amid the uncertainty surrounding Evergrande and debt and repayment concerns weighing on borrowing costs.
Debt bankers are also reporting that few companies are interested in extending credit to the market as uncertainty clouds the industry.
ar, es / rs (AFP, AP, Reuters)