Evergrande restructuring is well-balanced so far
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Reuters Reuters
HONG KONG (Reuters Breakingviews) - China Evergrande’s restructuring is being run on some useful populist principles. Local governments are stepping in to ensure suppliers don’t get stiffed and buyers receive apartments they paid for in advance, Caixin reports https://www.caixinglobal.com/2021-09-27/in-depth-local-governments-take-control-of-evergrandes-revenue-from-home-presales-101778567.html. Bigger investors in the struggling property developer will therefore shoulder significant losses, and that’s OK.
The company reported 165 billion yuan ($26 billion) of prepayments as of June 30. Also coming due are 951 billion yuan of trade payables. Combined, that far exceeds the $20 billion owed holders of Evergrande dollar bonds. The figures reflect founder Hui Ka Yan’s strategy of shifting liabilities away from state-controlled banks toward smaller, less powerful entities. The ploy removed risky debt from lenders’ balance sheets, but Evergrande also stopped paying vendors to conserve cash - and then contractors stopped building. It also began defaulting on wealth management products sold to ordinary investors and its own employees.
These forms of finance are points of serious political sensitivity; no municipal official wants to see television footage of enraged citizens outside their offices, wailing about putting their life savings into an apartment Evergrande can’t finish or a wealth management product it can’t pay off. Nor do authorities want a wave of bankruptcies in their local construction industry. At the same time, the entire market has begun to freeze as buyers wonder whether other developers, most of which are also heavily indebted, will be able to deliver promised properties.
This makes it an easier call for Beijing, which tends to be guided by what’s best for at least 51% of the population. It’s also arguably preferable to the way U.S. banks were bailed out during the financial crisis while many homeowners were left to suffer.
There’s a whiff of moral hazard from rescuing investors who bought high-yielding WMPs from Evergrande. On the other hand, many of them were staff forced to do so. And it would be even more counterproductive for regulators, who have been trying to reduce risk in the system, to rescue investors who traded shares and junk bonds issued by a notorious financial engineer on the expectation it was too big to fail. Sometimes political expediency and financial common sense are aligned.
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CONTEXT NEWS
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China’s central bank vowed to protect consumers exposed to the housing market on Sept. 27 and injected more cash into the banking system as market concerns mount over the ability of property developers to survive Beijing’s push to rein in their debt levels.
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On the same day, shares of China Evergrande’s electric-car unit fell as much as 26% after it warned it faced an uncertain future without a swift injection of cash. The Hong Kong-listed company added that it has cancelled plans to raise funds via a listing on a mainland exchange.
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Chinese financial magazine Caixin reported on Sept. 27 that local governments have begun to take control of some of Evergrande’s revenue to ensure construction on local projects, many of which have been pre-sold to local buyers, is completed and funds are not transferred to other regions.
(Editing by Jeffrey Goldfarb and Katrina Hamlin)
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