Chinese property developer Evergrande is heading for bankruptcy. That is what all the signs indicate. With bankruptcy looming, many international brokers were hoping for a miracle (sponsored by the Chinese government), but none has come so far.
According to a report by FINANCIAL REVIEW, US-dollar denominated bonds are trading at an all-time low of between 15¢ and 25¢ on the dollar, a strong indication of the level of investor pessimism on the ability of the Chinese company to recover or give out to investors.
Evergrande is China’s largest issuer of junk bonds with over $19 billion ($26 billion) in dollar-dominated debt. While there were reports that the company was close to closing a deal to sell a stake of its more than $7 billion property unit to Hopson Development to ease its liquidity strains, Evergrande is still in trouble. It has so far failed to meet its payment obligations to offshore bondholders twice in September.
Moreover, the Chinese government, which was expected to be the last saving grace for the country’s second-largest property developer, has stood firm on its decision to offer no help.
This decision was further re-iterated on a Global Times editorial, the mouthpiece of the Chinese Communist Party, that blasted US Secretary of State Antony Blinken after he urged the Chinese authorities to act ‘responsibly’ in addressing Evergrande’s liquidity crisis. The US official warned that Evergrande’s crisis could affect the global economy.
His statement was echoed in Australia’s Reserve Bank, the nation’s central bank that warned that the collapse of Evergrande could cause chaos within the Chinese financial system. The result of this as explained by Yun Jiang, the managing editor in the School of Regulation and Global Governance at the Australian National University, would be a cut in China’s steel production. This would further hit the price of Australia’s main export to China and the world, iron ore.
Despite these forecasts, Chinese authorities remain steadfast in their decision to stay out of the problem.
As stated in the Global Times: “China will not change its own pace of economic adjustment for the sake of external pressure or placating the market.”
And even after admitting that there were “signs of softening throughout the real estate sector as a whole”, authorities remained focused on “its own set of priorities and maintains the focus on deflating the real estate bubble and reducing risks.”
Beijing remains indifferent to Evergrande’s financial woes and has instead chosen to prioritize domestic stability. They will only step in to help finish the over 800 projects for 1.5 million people waiting for homes while also supporting Evergrande’s contractors and suppliers.
While these efforts could help avert a potential $60 trillion collapse of the Chinese property sector, their refusal to help foreign creditors would cause an intense liquidity squeeze for a lot of China’s property developers.
Moreover, Evergrande’s crisis has resulted in a slump in property sales as prospective home buyers have become a lot warier in paying upfront for unfinished apartments.
China Real Estate Information Corp, the Chinese real estate data collector, reported that sales for September 2021 were down 36.2 per cent from September 2020, a slight increase compared with August’s 20.7 per cent slide.
To survive, Evergrande will be forced to drop all new developments and focus on selling existing properties to generate some cash.
Experts predict a wave of defaults among Chinese property firms which could wipe off as much as 4 percentage points off China’s growth rate in the coming year. Perhaps this would be the shock needed to jolt Beijing into saving Evergrande and with it the global economy.