Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

Evergrande can't pay its debts. China is scrambling to contain the fallout

Evergrande can't pay its debts. China is scrambling to contain the fallout

Evergrande has defaulted on its debt. Now Beijing is intervening to prevent a disorderly collapse of the indebted real estate group that could wreak havoc on the world's second biggest economy.

Fitch Ratings on Thursday declared that the embattled property developer has entered "restricted default," reflecting the company's inability to pay overdue interest earlier this week on two dollar bonds. The payments were due a month ago, and grace periods lapsed Monday.

Evergrande's apparent failure to pay that interest has revived fears about the future of the company, which is reeling under more than $300 billion of total liabilities. Evergrande is massive — it has about 200,000 employees, raked in more than $110 billion in sales last year, and owns more than 1,300 developments in more than 280 cities, according to the company.

Analysts have long been concerned that a collapse could trigger wider risks for China's property market, hurting homeowners and the broader financial system. Real estate and related industries account for as much as 30% of GDP.

Chinese authorities have so far downplayed the prospect of spillover risks.

"China's leadership is attempting to play it cool, but the circumstances surrounding Evergrande's downward spiral raises serious questions about [Chinese President] Xi Jinping's stewardship over China's rapidly cooling economy," said Craig Singleton, an adjunct fellow in the China Program at the Foundation for Defense of Democracies, a research institute based in Washington, D.C.

There's already plenty of evidence that Beijing is taking a leading role in guiding Evergrande through a restructuring of its debt and sprawling business operations.

The local government in Guangdong province, where Evergrande is based, said late last week that it would send officials into the firm to oversee risk management, strengthen internal controls and maintain normal operations.

And earlier this week, Evergrande announced it would set up a risk management committee, including government representatives, to focus on "mitigating and eliminating" future risks. Among its members are top officials from major state-owned enterprises in Guangdong, as well as an executive from a major bad debt manager owned by the central government.

Chinese authorities have taken other steps as well. The central bank on Monday announced that it would pump $188 billion into the economy, apparently to counter the real estate slump.

"These latest interventions, by both the central government and officials in Guangdong, suggest Chinese officials now begrudgingly accept that Evergrande is, in fact, 'too big to fail,'" Singleton said.

Global investors may 'take a hair cut'


The massive restructuring is going to come with some pain, at least for global bond holders.

Beijing has made it clear that its priority is protecting the thousands of Chinese people who have bought unfinished apartments, along with construction workers, suppliers and small investors. It also wants to limit the risk of other real estate firms going under. Investor fears over Evergrande's default have pushed up financing costs for other developers, as yields on offshore Chinese corporate debt surge.

At the same time, the government has been trying for more than a year to rein in excessive borrowing by developers — and so won't want to dilute that message.

That means the government may be "happy to see the firm itself go under and investors take a haircut," said Louis Kuijs, head of Asia economics at Oxford Economics, in a research note on Friday.

Chinese regulators have blamed Evergrande's crisis on the company's leaders. Its problems were the result of "poor management and blind expansion," the central bank and the country's securities regulator said Monday in public statements, reiterating previous criticisms.

Yi's comments on Thursday, made during a video speech to a forum in Hong Kong, underscore the government's priorities. He noted that Evergrande's problems would be handled in "a market-oriented way."

That "reinforces the ongoing stance from authorities of not turning to any bailout," said Yeap Jun Rong, market strategist for IG Group.

Spillover to growth


It's a "delicate balancing act" to allow Evergrande to fail while minimizing any economic or financial impact, Kujis said, especially given the broader downturn in real estate that has already seen several other developers default, including Kaisa Group this week.

New home prices in China fell in October for the second consecutive month, according to figures from the National Bureau of Statistics. The fall in September was the first in six years on a month-on-month basis.

A major slowdown in the property sector, along with other factors, could drag China's GDP growth next year down to 4.3%, according to Ting Lu, Nomura's chief China economist. That's much lower than the firm's estimated growth for 2021 of 7.8%.

During an online conference Friday, Lu also warned that the government shouldn't suddenly reverse its curbs on real estate finance. Such a turnaround would hurt Beijing's long-term goals, he added, pointing to its desire to reduce the economy's reliance on property and divert resources away from property into other sectors, such as tech.

Kuijs from Oxford Economics expects Beijing to take targeted policy measures for homeowners, troubled developers, or banks that are exposed to debt risks. He suggested such moves could include making it easier for developers to raise funds on the capital market, adjusting land policies, and increasing the construction of rental units.

"We also expect broader easing of fiscal and monetary policy," he said. "And it is likely the government will take steps to contain ripple effects in the financial system, including possibly ring-fencing banks particularly exposed to developers in trouble."

Singleton warned, though, that the real estate crisis remains a looming threat for China.

"The possibility of contagion in other parts of China's vast economy remains very real," he said. "And, it is on this issue where China's central bank faces its biggest constraint — while it may be able to contain the financial implications from a housing default, it cannot offset the housing market's impact on China's real economy."

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Russia’s A7 Builds a State-Linked Payments Network Beyond Western Sanctions
AI’s Next Bottleneck Is Power, Not Just Nvidia Chips
Meta Raises AI Spending Target to as Much as $145bn Despite Pressure Over Returns
Danube Drought Exposes Nazi Wrecks and Pushes Central Europe’s Power System to the Brink
Joe Biden’s Cancer Has Spread Beyond His Bones, Hunter Biden Says
Why 2027 Could Be a Strong Year for Stocks—and Why the Forecast Is Fragile
Why Markets May Look Quiet in August After Big Tech Earnings
UK Drought Cuts Harvests and Raises Food-Security Fears
UFO: Pentagon Releases Video of Unidentified Object Tracked Over Middle East
Ukraine Tells Senate Republicans Its Drone War Offers a Blueprint for America
Weight-Loss Drug Boom Tests the Limits of Prescription Advertising Rules
Senate Scrutinises AI-Driven Personalised Pricing
Spain Seeks Mainland Transfers for 1,100 Children Stranded in Ceuta
Spain and Morocco Trade Blame After 72,000 Migrants Enter Ceuta
AI Is Remaking the US Economy, From GDP Growth to iPhone Prices
Europe’s Heat and Drought Are Now Disrupting Power, Shipping and Tourism
Europe’s Drying Rivers Trigger Power Cuts, Factory Shutdowns and Wildfire Emergencies
Record-Low Danube Forces Nuclear Cuts and Emergency Power Curbs
Danube Drought Forces Hungary’s Paks Nuclear Plant Into Full Shutdown
Ceuta Death Toll Rises as Spain and Europe Clash Over Border Response
Valued at $109 Million: F-35B Fighter Jet Crashes in Southern California
Record-Low Danube Exposes Probable Mammoth Remains in Bulgaria
US Says It Has Carried Out Heavy Strikes on Iran After Attempted Attacks on Its Forces
The AI User Nightmare: Private Claude Conversations Leaked to the Internet
Over 24 Hours in the Air: Qantas Airbus Completes Record-Breaking Test Flight
Massive Wildfires Ravage Southern Europe: Fatalities in Greece and Evacuations Across France, Spain, and Turkey
Nvidia Reportedly Takes Vast Texas Data-Centre Lease to Underwrite AI Expansion
FIFA’s Private-Investment Plan for World Cup Rights Draws European Revolt
Apple Briefly Crosses Five Trillion Dollar Valuation as Investors Retreat From AI Bets
Fresh Heatwave Threatens to Rekindle France’s Historic Wildfire Crisis
Following OpenAI's Cyberattack: 'Most Companies Still Do Not Understand What Is Coming'
OpenAI Sued After ChatGPT Allegedly Discouraged Emergency Care Before Near-Fatal Embolism
Miliband Sets Climate and International Law at Centre of UK Diplomacy
Czech Central Bank Governor Rejects Early Euro Entry and Rate-Cut Pressure
Trump Readies New Tariffs as Temporary Global Levy Nears Expiry
Vivienne Westwood Casts Cicciolina, 74, in Its New Autumn Campaign
Dejavu: Germany’s Military Expansion Reshapes Europe’s Strategic Balance With France
Morgan Stanley Builds a Wall Street Lead in AI Infrastructure Finance
High Prices Push Coffee Drinkers Toward Whole Beans and Home Brewing
Trump Draws Boos and Podium Scrutiny at Spain’s World Cup Triumph
Brilliant move: Péter Magyar Moves to Nominate Chess Grandmaster Judit Polgár as Hungary’s President
Spain Defeats Argentina in Extra Time to Win Second World Cup
Current AI Seeks to Build an Open Global AI Infrastructure Outside Big Tech Control
Germany’s Economic Malaise Reopens the Sunday Shopping Debate
Proposed U.S.-Saudi Nuclear Pact Could Permit Limited Uranium Enrichment Under International Safeguards
Netherlands Declares Water Shortage Emergency After Drought Pushes Rivers to Historic Lows
Why Kentucky Fried Chicken Became KFC—and Why the False Explanations Persist
Ukrainian Drones Strike Wildberries Warehouses Deep Inside Russia
Reported CIA Mission Helped Clear the UAE’s Path to Advanced US AI Chips
Artificial Intelligence Capital Fuels Markets While Governments and Regulators Face Mounting Strategic Tests
×