Dusseldorf The heavily indebted Chinese real estate developer Evergrande has gained time in its struggle for survival: on Wednesday it sold part of its stake in Shengjing Bank to the state-owned investment company Shenyang Shengjing for around $ 1.5 billion. The intervention of a state buyer already indicates how Beijing intends to avert a disorderly bankruptcy of the real estate conglomerate.
The clock is ticking for Evergrande. The group did not pay interest due to bondholders on time last week. Another payment deadline for bondholders passed on Wednesday. Officially, however, a payment default only occurs if the outstanding claims are not settled within a 30-day grace period.
The group owes money not only to bond investors, but also to employees, small savers, construction companies and suppliers. According to official figures, Evergrande’s debt is $ 300 billion. There is also speculation about high off-balance sheet liabilities.
How will the conglomerate continue? Three scenarios.
Scenario 1: Evergrande manages to pay off its debts on its own
In order to avoid an official default, Evergrande must pay the interest obligations to bondholders within 30 days. The group itself warned at the end of August that it might no longer be able to service its liabilities if the company fails to raise liquidity by selling parts of the company and real estate and taking out new loans.
The sale of the shares in Shengjing Bank for 1.5 billion dollars gives Evergrande a little breathing space. According to the stock exchange announcement, the proceeds will also be used to pay Evergrande’s debts with the bank. However, there is no progress in the sale of other parts of the company. So far, the group has been negotiating unsuccessfully with an interested party from the state for the administration building in Hong Kong, from whom it hopes to generate proceeds of the equivalent of two billion dollars. Potential investors for the listed subsidiaries, the healthcare company Evergrande New Energy Vehicle and the property management company Evergrande Property Services, are also holding back.
The way to new loans is largely blocked for the group because Evergrande tears the so-called three red lines. China’s financial supervisors introduced these requirements in August of last year to counter the overheating of the real estate sector. Evergrande’s crisis has worsened since then. Despite the massive liquidity bottlenecks, the majority owner and founder Xu Jiayin has apparently so far refused to sell properties in prime locations such as the tech metropolis of Shenzhen.
Conclusion: unlikely.
Scenario 2: Evergrande is smashed and business continues with government support
Most experts now assume that Evergrande will not be able to meet its obligations. Rating agencies such as S&P, Moody’s and Fitch expect payment default.
Meanwhile, there are increasing signs that the Chinese authorities are also preparing for a collapse of the nested conglomerate. The sale of Shengjing Bank is a clear indication of how the government envisions a fall-back solution for Evergrande. According to media reports, Beijing has ordered local governments and state corporations to intervene if Evergrande is unable to regulate its affairs in an orderly manner.
Experts expect the real estate projects to be continued with state support, for example from local governments in Guangdong or Shenzhen. According to a report by the business magazine “Caixin”, several Chinese local governments have set up deposit accounts for Evergrande projects that have not yet been completed. This should ensure that the advance payments from property buyers are used to complete construction projects and not for other purposes, such as payments to creditors.
“The authorities will try to prevent Evergrande’s problems from harming the company’s home buyers, suppliers and contractors,” said Moody’s analyst Michael Taylor. Sheldon Chan, head of the Asian bond strategy at brokerage house T. Rowe Price, also assumes that the government will focus on “the social consequences of unfinished housing units.”
Other real estate developers like Country Garden have already expressed an interest in some Evergrande projects and lots. In the course of a government-monitored restructuring, Evergrande is likely to be forced to sell projects and land reserves. State real estate developers such as China Vanke are also said to have been instructed to take over Evergrande’s projects. The primary goal of the Chinese leadership is to prevent Evergrande’s troubles from affecting other real estate companies.
Foreign investors, on the other hand, are likely to be left behind. From a legal point of view, there is a subordination to offshore debts, which is why domestic creditors are likely to be served more, emphasizes Alexander Aitken, one of the partners of the law firm Herbert Smith Freehills.
Conclusion: probably
Scenario 3: An Evergrande collapse leads to a domino effect
The greatest risk in the event of Evergrande defaulting is that China’s households will lose faith in real estate as an asset class. This is because the prepayments by buyers are the most important source of finance, especially for low-capital developers with limited access to bank loans. A lack of private investments threatens a domino effect on the real estate market.
Many Chinese have invested in home ownership due to a lack of alternative investment opportunities. It is estimated that around three quarters of households’ wealth is in real estate. Your investments are the basis for the construction boom of the past two decades and an important driver of economic growth. Because the real estate industry contributes around a quarter of the Chinese gross domestic product.
Allianz chief economist Ludovic Subran says that this share should increase even further, as the real estate sector was one of the most important drivers for the upswing after the corona pandemic. A more extensive crisis in the real estate market in China would therefore lead to a severe slowdown in the Chinese economy. What is more, an accompanying “loss of trust in the population could have an impact on Chinese consumption,” warns Jens Ehrhardt, asset manager and founder of DJE Kapital.
The analysts of the US bank Citi have already lowered their forecasts for economic growth in China because of the debt problems of the real estate company Evergrande. The experts assume that the gross domestic product in the People’s Republic will only grow by 4.9 percent instead of 5.5 percent next year.
Conclusion: not excluded.
More: Built on Debt – How China Is Now Turning Its Real Estate Sector Inside Out