China Evergrande Group is teetering on the brink of default, forcing Beijing to reassure the world that everything is fine. But the cash-strapped property developer’s financial troubles are only intensifying, surviving from one deadline to the next without any respite in sight. Evergrande’s collapse could trigger a ripple effect throughout the economy and potentially manufacture a contagion event for the global marketplace. Creditors’ patience is wearing thin, and officials do not desire another headache as they attempt to advance their COVID Zero strategy. Indeed, big trouble in little China is brewing.
Lenders Yuan Their Money
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For the last couple of months, Evergrande has either missed or executed 11th-hour payments. And, once again, the nation’s ex-largest property developers will grapple with the end of a 30-day grace period, with dues totaling more than $82 million. The company ostensibly threw in the towel, resulting in a sharp selloff.
Evergrande issued a statement confirming that it could not guarantee funds for coupon repayment and creditors had requested $260 million. “In light of the current liquidity status … there is no guarantee that the group will have sufficient funds to continue to perform its financial obligations,” it said.
The stock plunged about 20% in Hong Kong, falling to $0.23 per share. This is the lowest it has traded since it was first listed on the exchange in 2009. Year-to-date, Evergrande shares have cratered about 90%. Bond yields have also slumped, with the dollar bond due on March 2022 sliding more than 11 cents on the dollar to 22.4 cents. Financial analysts anticipate additional bleeding after the firm suggested it is in the beginning stages of a debt restructuring plan, something that could spell the end of this saga of uncertainty and chaos.
A separate exchange filing on Dec. 3 noted that the developer would soon “actively engage” with offshore creditors. Moreover, the province of Guangdong sent founder Hui Ka Yan to sustain operations, monitor risk management, and enhance internal control. Authorities’ position has been that they would not intervene, choosing to allow the company and its partners to tackle the matter. Still, these moves could finally address its $300 billion in domestic and foreign liabilities that have become too severe.
China is beginning to take action to prevent the Evergrande storm from engulfing the entire economy, especially as it grapples with an outbreak of COVID-19 infections. But will Beijing’s tactics stop a financial crisis from sweeping the country, or will the leadership prolong the agony and hope for a miracle to save face? Contrary to the Tao Te Ching, crisis is perhaps not an opportunity.
A Spiked Tāng Wan Coming?
The People’s Bank of China (PBoC) is bracing for impact as it has pulled the trigger on money supply expansion. After months of maintaining the status quo and speaking through both sides of their mouths, central banks injected the market with money by cutting the reserve requirement ratio (RRR), the amount of cash financial institutions are mandated to hold in reserves. Although the PBoC did not mention Evergrande in its announcement, market analysts concur that the real estate developer was the reason for this decision.
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According to a statement published on the central bank website, the PBoC noted that it wishes to “support development of the real economy,” adding that the RRR reduction was not necessarily a change in “prudent monetary policy.” This comes weeks after the institution blamed Evergrande’s challenges on its “own poor management” and “reckless expansion.” The central bank and perhaps the Chinese Communist Party (CCP) ostensibly forgot about their low interest rates and public policy pursuits championing such business endeavors.
Meanwhile, banks, insurance companies, and securities regulators all published statements attempting to downplay the severity of Evergrande’s impending doom. This has some speculating that the company has already initiated a debt-restructuring process but has refrained from making a public announcement. Sources close to the situation noted to Bloomberg that Evergrande will be adding its offshore public bonds and private debt obligations to its restructuring campaign.
Will this new monetary expansion construct a barrier between China and a financial calamity? Indeed, the entire real estate sector could come crashing down as a growing number of these property giants, such as Kaisa Group Holdings and China Aouyuan Property Group, have become so indebted and risk nationwide default.
Will America Catch China’s Cold?
The Chinese yuan has strengthened against the U.S. dollar. Asian stock markets have climbed higher so far this week. Business media have calmed down the apocalyptic coverage. Evidently, global financial markets are no longer too concerned about Evergrande. But it is not only Evergrande they should lose sleep over. Every facet of China’s market is on the brink of a steep downturn, whether the nation’s ballooning electric vehicle bubble or the exploding municipal debts. The Red Dragon is full from gorging on easy money – and now it is about to heave. The whole world, including the United States, will get messy.
~ Read more from Andrew Moran.
