S&P Global Ratings has warned that Chinese real estate company, China Evergrande, which is currently facing financial issues, might not receive any aid from Beijing as some experts believe.
Evergrande has raked up a massive $305-billion in debt. Chinese regulators have warned that if the company’s debts are not stabilized, it could pose a broader risk to the country’s financial system.
“We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy… Evergrande failing alone would unlikely result in such a scenario,” the ratings agency said in a Sept. 20 note.
Earlier this month, Fitch Ratings downgraded Evergrande and two of its subsidiaries. The agency warned that the downgrade represents the possibility of a “default of some kind.” Moody’s Investor Service and China Chengxin International have also downgraded Evergrande. Goldman Sachs’s analysts Kenneth Ho and Chakki Ting warned in a recent note that further disruptions to Evergrande’s operations can lead to a negative sentiment that can “potentially spill over” to the broader property sector. JPMorgan stated that government action will be necessary to prevent a spillover.
A big test of Evergrande’s financial stability will take place this week as the company is due to pay $83.5-million in interest on its March 2022 bond. Another $47.5-million payment for March 2024 notes is due by the end of this month. If Evergrande fails to pay off the interest within 30 days of the payment date, the bonds will default. In such a scenario, Evergrande will have to restructure its bonds. The market is also expected to enter a panic phase due to the defaults.
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On the Hong Kong Stock Exchange, Evergrande’s stock price has crashed for much of this year. After peaking at $HK17.26 (US$2.22) in January, shares of the company are now trading at $HK2.27 ($US0.29), a decline of over 86 percent.
In an interview with Reuters, Kington Lin, managing director of the asset management department at Canfield Securities Limited, said that Evergrande shares could fall even below $HK1.00 ($US0.13) if the company is forced to sell a major portion of its assets as part of its restructuring efforts.
“[Evergrande’s] stock will continue to fall, because there’s not yet a solution that appears to be helping the company to ease its liquidity stress, and there are still so many uncertainties about what the company will do in case of a restructuring,” Lin said.
Evergrande’s $305-billion debt is almost equivalent to two percent of China’s GDP. The company has 1,300 projects across China and employs 123,276 people. Evergrande is basically so big that any failure will inevitably affect the Chinese economy. This is one reason why many investors feel that Beijing might step in to resolve the issue since the last thing the CCP wants is an economic crisis that rattles its citizens.
In an interview with CNBC, Jimmy Chang, Chief Investment Officer at Rockefeller Global Family Office, stated that Chinese state-owned enterprises might end up taking over Evergrande. He feels Beijing needs to act quickly to prevent the Evergrande situation from affecting sentiment.
“It could be a self-fulfilling prophecy. This liquidity issue — real estate is so important to the Chinese economy and the financial well-being of so many Chinese families. Home ownership is over 90%… So many people buy apartments as an investment, so if this thing is not contained, it could become a real black swan,” Chang said.
Mark Williams, Chief Asia Economist at Capital Economics, feels that Beijing will step in to prevent the “wider financial system” from suffering a crisis. Authorities might seek to keep the banking system intact while allowing property developers to “suffer considerable pain.”
As to what the global consequence of an Evergrande blow-up would be, opinions are mixed. Some do not see much of an impact globally since most of the company’s debts are RMB denominated. They expect the contagion to be contained within China.
“I don’t think the Evergrande meltdown, and the financial problems of Chinese property companies more broadly, will reverberate back on the US economy or markets,” Mark Zandi, chief economist at Moody’s Analytics, told CNN.
However, some experts warn of potential after-effects of the Evergrande collapse affecting the global economy. Real estate activity in China is about 30 percent of the GDP, with the residential property market equaling 20 percent of the GDP. 1.4 million people are waiting for Evergrande to deliver properties for which they have made deposits.
If Evergrande fails and projects get stalled, it will have a severe effect on China’s property market. If other property companies also exhibit risks, the damage to the real estate market would be substantial. This has the potential to affect the global economy as China’s imports of raw materials will decline.