China property market faces more nationalisation

4 minute read

China Evergrande Group Chairman Hui Ka Yan attends a news conference on the property developer's annual results in Hong Kong, China March 28, 2017. REUTERS/Bobby Yip/File Photo - RC2BVQ9AGILG

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HONG KONG, Dec 6 (Reuters Breakingviews) - China's private homebuilders might struggle to stay private for much longer. Evergrande, the country's most indebted developer, has admitted it might formally default. read more With $10 billion in property bonds maturing in January alone, officials are under pressure to keep the sector from collapsing without softening their hard line on debt levels.

It is unsurprising that China Evergrande (3333.HK) is unlikely to come up with the money. Chairman Hui Ka Yan has even resorted to tapping his personal wealth, per a Reuters report. But so far only a few smaller peers have officially defaulted in the public market. Now Evergrande says it has received a payment request under a $260 million guarantee obligation, having already failed to make $82.5 million in coupon payments. The 30-day grace period is up on Monday, at which point Evergrande will have officially defaulted for the first time.

Financial regulators issued statements on Friday arguing Evergrande is an isolated case. That evening Premier Li Keqiang flagged an upcoming bank reserve requirement ratio cut, while Evergrande’s provincial government in Guangdong sent a work group to oversee "risk management". That sounds similar to what happened to aviation conglomerate HNA before a restructuring. But while HNA was somewhat unique, Evergrande is just the worst member of a troubled crew with $1.5 trillion in loans outstanding in September. In January alone they need to find $10 billion for maturing offshore and onshore bonds, according to data from consultancy China Index Academy.

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Policy easing has been underwhelming. Central bank officials said banks should not over-tighten credit to developers, and there are signs that some are being allowed to issue onshore bonds and asset-backed securities. But the beneficiaries have primarily been state-controlled developers like Poly Developments (600048.SS) and China Merchants Shekou (001979.SZ). One property executive told Breakingviews that some bankers informed him they received guidance to steer clear of private real estate firms.

As private companies like Kaisa (1638.HK) and Sunac (1918.HK) – the biggest dollar bond issuers after Evergrande – try to conserve cash, they are struggling to complete pre-sold projects and pay suppliers. This is where the contagion risk lies, and Beijing must head it off. As capital flows to state-owned developers, they will be first on the hook to step in to help, and another once-vibrant part of China’s private economy will come under increasing state control.

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- China Evergrande warned in a filing to the Hong Kong stock exchange on Dec. 3 that there is no guarantee that the group will have sufficient funds to continue to perform its financial obligations in light of its current liquidity status.

- Evergrande had received a payment request under a $260 million guarantee obligation, according to the filing. It has already missed one $82.5 million payment deadline, and the 30-day grace period ends on Dec. 6.

- The government of southern China's Guangdong province, where Evergrande is based, said in a statement on Dec. 3 that it summoned Evergrande chairman Hui Ka Yan immediately after the company made the statement. It added that it would send a working group to Evergrande, at the company's request, to oversee its risk management and urge a strengthening of internal control.

- In a series of apparently coordinated statements late in the evening on Dec. 3, China's central bank, banking and insurance regulator, and its securities regulator indicated Evergrande’s risks to the broader property and financial sector are limited. The People’s Bank of China said the offshore bond market is “highly market-driven” with mature investors, and that problems with individual developers won’t prevent others from raising debt from the market in the longer term.

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Editing by Pete Sweeney and Katrina Hamlin

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