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Wednesday, December 1, 2021

Chinese Troubled Evergrande Gets Relief, Strikes Debt Deal

Chinese Troubled Evergrande Gets Relief, Strikes Debt Deal

The world’s most indebted real estate developer, Evergrande, is due to make interest payments of $84m (£61m) on its overseas bonds on Thursday.

The amount due for the domestic bond is estimated to be $35.9m (£26.3m).

The main property unit of the Chinese real estate giant said it has struck a deal over a bond interest payment which is due on Thursday.

Earlier in the week, the company started to repay investors in its wealth management business with property as it struggled to find cash to meet its liabilities.

The announcement will offer some relief to investors concerned over the company’s debt crisis.

 

In a statement filed with the Shenzhen Stock Exchange in mainland China, Hengda Real Estate Group said it had reached an agreement with holders of the onshore bond over the repayment.

However, the statement did not reveal how much interest would be paid or when any payment would be made, saying only that the bond “has already been resolved through private negotiations”.

The filing also did not mention the offshore bond.

Under agreements with investors, the company has a 30-day grace period before a missed payment on the offshore bond would become a default.

The firm’s problems have sent shockwaves around global markets over concerns it may be about to collapse.

Evergrande has been struggling to meet repayments on its debts of more than $300bn.

Earlier in the week, the company started to repay investors in its wealth management business with property as it struggled to find cash to meet its liabilities.

On Monday, Evergrande also reportedly missed interest payments to at least two of its biggest lenders.

Some analysts have cautioned that the failure of such a large and heavily-indebted property developer could have a major impact on the Chinese economy, which could potentially spread to the global financial system.

The Shenzhen Stock Exchange, which was closed on Monday and Tuesday, was around 0.7% lower in Wednesday’s trade.

The Hong Kong Stock Exchange is closed on Wednesday for the annual mid-autumn festival.

What does Evergrande do?

Businessman Hui Ka Yan founded Evergrande, formerly known as the Hengda Group, in 1996 in Guangzhou, southern China.

Evergrande Real Estate currently owns more than 1,300 projects in more than 280 cities across China.

The broader Evergrande Group now encompasses far more than just real estate development.

Its businesses range from wealth management, making electric cars and food and drink manufacturing. It even owns one of country’s biggest football teams – Guangzhou FC.

Mr Hui has a personal fortune of around $10.6bn, according to Forbes.

Why is Evergrande in trouble?

Evergrande expanded aggressively to become one of China’s biggest companies by borrowing more than $300bn (£217bn).

Last year, Beijing brought in new rules to control the amount owed by big real estate developers.

The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.

Now, it is struggling to meet the interest payments on its debts.

This uncertainty has seen Evergrande’s share price tumble by around 85% this year. Its bonds have also been downgraded by global credit ratings agencies.

What would happen if Evergrande collapses?

There are several reasons why Evergrande’s problems are serious.

Firstly, many people bought property from Evergrande even before building work began. They have paid deposits and could potentially lose that money if it goes bust.

There are also the companies that do business with Evergrande. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.

The third is the potential impact on China’s financial system.

“The financial fallout would be far reaching. Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms,” the Economist Intelligence Unit’s (EIU) Mattie Bekink told the BBC.

If Evergrande defaults, banks and other lenders may be forced to lend less.

This could lead to what is known as a credit crunch, when companies struggle to borrow money at affordable rates.

A credit crunch would be very bad news for the world’s second largest economy, because companies that can’t borrow find it difficult to grow, and in some cases are unable to continue operating.

This may also unnerve foreign investors, who could see China as a less attractive place to put their money.

Is Evergrande ‘too big to fail’?

The very serious potential fallout of such a heavily-indebted company collapsing has led some analysts to suggest that Beijing may step in to rescue it.

The EIU’s Mattie Bekink thinks so: “Rather than risk disrupting supply chains and enraging homeowners, we think the government will probably find a way to ensure Evergrande’s core business survives.”

Others though are not sure.

In a post on China’s chat app and social media platform WeChat, the influential editor-in-chief of state-backed Global Times newspaper Hu Xijin said Evergrande should not rely on a government bailout and instead needs to save itself.

This also chimes with Beijing’s aim to rein in corporate debt, which means that such a high profile bailout could be seen as setting a bad example.

 

SOURCE: bbc.com

 

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