Evergrande isn’t Lehman but could still cause a credit crunch in China

MOSCOW/CAIRO: Evergrande Group is a massive Chinese property developer with debts of $300 billion it is struggling to pay, Arab News reported.

A major default by the Fortune Global 500 firm would send shockwaves through the Chinese economy and may cause foreign investors to pull cash out of China and other emerging markets.

This raises fears of a credit crunch that led to the 2008 financial crisis, although fall-out from the company’s woes has so far been concentrated in the property sector.

The shares and bonds of another Chinese property developer, Sunac China Holdings Ltd have fallen sharply this week, as investors fear the company could run into similar troubles as Evergrande.

The enormous scale of Shenzhen-based Evergrande, which was founded in 1996, has led to the wall of debt it faces.

It builds around 600,000 homes a year, but also owns theme parks, builds electric cars and even owns the Guangzhou football team. The firm has 750 projects in 233 cities across China and employs over 160,000 staff.

However, the company has been caught up in Chinese President Xi Jinping’s crackdown on firms, particularly in the property and the tech sector, to curb growth based on excessive borrowing. Last year the government placed restrictions on the amount property firms could borrow.

Following a slowdown in building work caused by the pandemic, the firm faced $83.5 million interest payment on dollar-denominated bonds on 23 September, which passed without investors receiving their money, according to the WSJ. Although the firm has a month’s grace before it is recorded as a default.

The focus now turns to whether a coupon payment of $47.5 million due on Wednesday is made.

About $2.8 billion worth of bonds will mature by the first quarter in 2022, followed by $3.2 billion in the second quarter, according to a note by BofA Global Research issued 9 September.

Following months of falling sales, the firm has around 1.5 million unfinished apartments that it needs to deliver to investors. It has such huge cash flow problems that it is paying suppliers with partly finished apartments rather than money.

It also owes cash to 171 domestic banks and 121 other financial firms, according to the Economist Intelligence Unit.

However, several local Chinese councils have set up special custodian accounts for Evergrande property projects to protect funds earmarked for housing projects from being diverted, reported Chinese media outlet Caixin over the weekend.

Beijing appears to be moving to prevent a total collapse of a firm that has so many links into the wider Chinese economy.

But such aid tests China’s crackdown policy, which is meant to prevent firms that are too big to fail writing cheques they cannot cash.

China’s central bank this week vowed to protect consumers exposed to the housing market and injected more cash into the banking system.

In a statement on Monday the People’s Bank of China said it would “safeguard the legitimate rights of housing consumers”

Most China watchers expect the government’s containment efforts to be focused on prioritizing small investors ahead of foreign holders of Evergrande debts.