Evergrande’s latest trouble in firming up a long-awaited debt restructuring plan led to a sell-off in its and peers’ shares on Monday, as worries resurfaced about the crisis-hit property sector after a brief respite. The world’s most indebted property developer, which has become the poster child of China’s property crisis, is trying to get its creditors’ approval for a debt revamp involving swapping their offshore bonds into new securities with different combinations of equity-linked instruments and shorter maturities. But, the company’s plans have been hampered by an investigation into its central domestic property unit, Hengda Real Estate Group Co Ltd. The investigation could lead to Hengda being barred from issuing new debt, making it harder for the developer to complete its offshore bond restructuring.
The development is an embarrassment for Beijing, which has pressed hard to get the country’s top developers to repay their debts and rein in soaring property prices. Investors fear that a collapse of Evergrande, the nation’s largest homebuilder, could set off a chain reaction that could derail the world’s second-largest Chinese economy. Worried investors have already called it “China’s Lehman Brothers moment.”
A collapse by the company would be a significant blow to Chinese property stocks and broader financial markets as a whole. The developer owes some $19 billion to overseas investors, with its debt load at the end of 2020 reaching a record 2.37 trillion yuan ($340 billion).
Investors have been keeping a close eye on the developer’s progress in resolving its debt issues, as many believe that any failure to do so will result in a significant credit crunch in China and global markets. “It’s one thing when someone borrows a few thousand dollars and doesn’t pay them back, but it’s another thing entirely when it happens in an entire country,” said Richard Welford at BNP Paribas.
Analysts say that China’s banking system is also at risk if Evergrande defaults. According to the state-backed CITI rating agency, about 41 percent of the country’s banking system’s assets are directly or indirectly associated with the property sector. “The risk to the banking system remains large,” CITI’s analysts said in a note.
In addition, Evergrande’s troubles have weighed on other developers in the country, with home sales by value falling and a wave of bankruptcies in the property sector sending stock prices tumbling. It has also spooked potential buyers and the drop in demand for homes has pushed down home prices and raised borrowing costs for the banks that lend to property developers.
Market participants think that China’s authorities will step in to prevent a full-scale Evergrande-style disaster. They are expected to intervene to try to contain the crisis by engineering a dismantling of the giant property developer into smaller, state-owned firms. But a full bailout is unlikely, as it could undermine Beijing’s campaign to rein in property lending and debt. Moreover, a government rescue of Evergrande would raise suspicions that the government was not doing its best to discipline the industry.