The fate of one of China’s biggest companies is hanging in the balance, with authorities reportedly quietly warning of its looming downfall.
Property behemoth Evergrande got a last-minute reprieve this week – but insiders claim Chinese authorities are quietly preparing for the company’s epic collapse.
The Chinese firm – now the world’s most indebted real estate company – had been facing a crucial deadline on Thursday to make good on interest payments on two Evergrande notes, with experts fearing it would default, sparking concerns of a credit crunch.
However, Evergrande managed to wrangle a last-minute deal, delaying the potential collapse that insiders predicted could lead to a global financial contagion.
Just before the deadline arrived, the firm announced its main unit, Hengda Real Estate Group, had managed to reach an agreement which would allow it to make a coupon payment on its domestic bondholders on September 23, with the announcement calming jitters in the market, with iron ore bouncing back on the news.
But it seems that relief may have been premature, with Evergrande’s collapse still highly likely.
According to the Wall Street Journal, insiders claim Chinese authorities are privately telling local governments to brace for Evergrande’s ruin, with leaders “getting ready for the possible storm” ahead.
Evergrande faces a string of bond payments in the weeks ahead, and the government’s chilling warning suggests it is unwilling to intervene to save the ailing juggernaut.
Sources told the WSJ local governments had been ordered to prepare to stifle unrest and alleviate impacts on homeowners and the economy where possible, such as by preventing future mass job losses, stepping in when it comes to real estate projects in their areas and relaxing home ownership rules.
According to the publication, China’s peak financial regulator, the Financial Stability and Development Committee, warned local governments earlier in September to establish “working groups to monitor social and economic instability around Evergrande”.
If Evergrande were to fail, it would likely lead to an explosion in abandoned, empty property – something China already has a glut of, with Rhodium Group director Logan Wright telling The Financial Times this week the country had enough empty property to house more than 90 million people.
Why is Evergrande in trouble?
The firm’s troubles began as China’s real estate market soared, with demand for homes in cities such as Beijing and Shanghai sending prices skyrocketing.
The company took out a string of loans and expanded rapidly, snapping up assets and making the most of China’s thriving economy.
But when property prices began to drop in smaller cities, and when the Chinese government rolled out measures to curtail over-the-top property borrowing, it left Evergrande in the lurch, with mountains of debt.
The crisis facing Evergrande is so massive that there are already signs the crisis is spilling over into even unrelated industries.
Jimmy Chang, chief investment officer at Rockefeller Global Family Office, told CNBC this week that if Beijing let the company collapse, the consequences would likely be global.
“Everyone was expecting the government would have some kind of resolution, given that Evergrande is a systemically important company,” he said.
“It has $300 billion in outstanding debt. There is a contagion issue if China Evergrande is not resolved.
“If China were to have a serious economic issue because of China Evergrande, the rest of the global economy would have contagion from it.”
Meanwhile, Australia is also facing a relatively unique risk from the potential Evergrande collapse, with many expecting the situation to have serious ramifications for China’s construction industry. This in turn will hurt Australia’s iron ore sector, which is heavily reliant on China.
‘Never admitting defeat’
Despite all the signs to the contrary, Evergrande’s billionaire founder Hui Ka Yan insists the company will survive the turmoil.
“I firmly believe that Evergrande people’s spirit of never admitting defeat, and becoming stronger when the going gets tough, is our source of strength in overcoming all difficulties,” he wrote in a memo to employees earlier this week.
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