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Evergrande wins stay of execution but Chinese property market remains on the brink.

Evergrande wins stay of execution but Chinese property market remains on the brink.

Embattled Chinese property developer Evergrade has won an extension until late January to restructure its substantial debts to avert liquidation amidst China’s ongoing property crisis. Hong Kong courts initially gave Evergrande until today to present a concrete debt-restructuring plan to its offshore creditors, after the initial plan to distribute equity stakes in its various subsidiaries failed to cut the mustard.

 

 

The company is at risk of being liquidated following a winding-up petition by creditor Top Shine Global. This action, if successful, would transfer control of Evergrande to liquidators tasked with selling assets to repay lenders. 

 

Evergrande is the most indebted property company on the planet, with some US$300 billion (£237 billion) in liabilities on its books. Its woes started in 2021, when China's communist party imposed stricter leverage requirements as part of its ‘Three Red Lines’ rule, thus limiting Evergrade’s access to funding. Since the vast majority of Evergrande’s portfolio consists of incomplete developments, this has led to indefinite delays of its past vast portfolio of residential and commercial developments across China.

 

Evergrande has faced protests from existing customers and a withdrawal of demand due to fears of their houses never being completed.Evergrande’s woes are a symptom is a wider crisis in China’s massive real estate market.

 

Following decades of substantial growth in property prices, China is awash with incomplete developments left to crumble after speculative property investments turned sour and construction ground to a halt.

 

The BBC estimates that Evergrande had up to 1.5 million unfinished homes in its portfolio in September 2021, when China’s real estate crisis was beginning to attract international attention. Comprising more than a quarter of gross domestic product (GDP), China’s property market is one of the world’s largest asset classes and is considered a proxy for the country’s economy as a whole. Property is also intrinsically linked to individual wealth, comprising a remarkable 70% of household wealth.

 

So it came as a major concern when China’s other major property developer Country Garden missed a $15 million interest call on its debts in August. The group is now considered in default on its overseas bonds.

 

As hundreds of thousands of properties across China remain unfinished, would-be homeowners have seen their life savings trapped in deposits for houses they may never see the inside of.

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Fixing China’s property sector could...

Fixing China’s property sector could take years — if not a decade.
China’s property market has been embattled by faltering consumer confidence in real estate companies as property giants Evergrande and Country Garden remain mired in debt woes. China’s urbanization drive may be drawing to a close — and that could further hurt the already ailing property sector, according to China economist Hao Hong.
 
 

“Fixing the property sector may be a multi-year or even a decade’s work in front of us. Reason being, we built way too many housing for Chinese people,” the chief economist of Grow Investment. “Also the Chinese urbanization process, which has been progressing very fast in the past 10 years, is coming to a halt,” Hong added.

 

China’s property market has been embattled by faltering consumer confidence, as property giants Evergrande and Country Garden are mired in debt problems. Evergrande, which defaulted in 2021 following a liquidity crisis, announced Friday it would delay a debt restructuring meeting which was due Monday. Country Garden is also teetering on default.
 

Hong noted that 18 trillion yuan ($2.46 trillion) worth of Chinese property were sold two years ago. He said managing 10 trillion this year, or five to six trillion yuan worth of sales further down the road, would be considered “lucky.”

 

China’s August new home prices dipped 0.3% month-on-month, extending the real estate slump. The figure also marked a 0.1% drop compared to a year ago.

 

Just over the weekend, a former Chinese official warned that China’s population of 1.4 billion would not be able to fill the unoccupied apartments across the country. “There is now an oversupply of real estate ... 1.4 billion people may not be able to live in them,” said He Keng, a former deputy head of China’s statistics bureau. He was speaking at a conference, according to local media reports.

 

China’s post-Covid economic recovery story has been disappointing, although August retail sales and industrial production data picked up pace with better-than-expected growth.

 

“Once people reset their expectation, and also the economy [restructures] to regrow from other industries rather than relying mostly on the property sector for growth, then we will actually have a better, much healthier Chinese economy than before,” said Hong.

 

“Not having an overbearing Chinese property sector actually is good for the Chinese economy going forward.”

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Source: CNBC

 


 

 

China plans US$44bn real estate fund...

China plans US$44bn real estate fund to bail out distressed sector.
China is reportedly planning to launch a real estate fund to assist property developers resolvea crippling debt crisis, with the 300 billion yuan (US$44bn) warchest aimed at restoring confidence in the industry.
 

This would be the country's first major step to save the beleaguered property sector since last year's debt troubles became public with the problems afflicting Evergrande. The People's Bank of China (PBOC) will initially support the fund with 80 billion yuan while the China Construction Bank will chip in a further 50 billion yuan, Reuters reports, though the funds will come from the PBOC's refinancing facility.

 

 

As part of the government's push to boost rental housing, the fund will reportedly bankroll the construction of unfinished home projects, which will be rented to individuals, and if the model works, other banks will follow suit with a target of raising 200 to 300 billion yuan.

 

Meanwhile, embattled Chinese real estate giant Evergrande, which has more than US$300bn in liabilities and defaulted on its debts late last year, expects to release a preliminary restructuring plan this week. An internal probe found that the developer's chief executive and finance head misappropriated around US$2bn (£1.7bn) in loans, with the company informing the Hong Kong Stock Exchange that the officials concerned had now resigned. Termed the world's most indebted property developer, Evergrande is reportedly in discussions with its property services unit about repayment terms. Evergrande has missed a crucial deadline for repaying its offshore debt as a US$2.6bn deal to sell a majority stake in the unit to a rival developer fell through in October. Over the last year, its shares have fallen by more than 75% and have been suspended from trading.

 

China's property sector has been lurching from one crisis to another and has slowed growth in the world's second-largest economy, as almost a quarter of China's gross domestic product (GDP) comes from the property market and related sectors, including construction.

 

Crisis in China’s Property Industr...

Crisis in China’s Property Industry Deepens.

Almost exactly a year after China’s property-market debt squeeze sparked the first in a wave of defaults by developers, the industry is fighting for survival. Home sales continue to plunge and elevated borrowing costs mean offshore refinancing is off the table for many developers. Global agencies are pulling their ratings on property bonds, while a string of auditor resignations is adding to doubts over financial transparency only weeks before earnings season. An 81% stock plunge in Zhenro Properties Group Ltd. highlighted the risks of margin calls as companies struggle to repay debt.

 

 

Yu Liang, chairman of China Vanke Co. -- one of the country’s largest developers -- urged staff to prepare for a battle that could make or break the firm, according to the South China Morning Post, which cited an internal document from last month. “We are on our last legs, which means there are no other options,” he said.

 

A Bloomberg index of Chinese junk dollar debt fell every day this week through Thursday, driving yields above 20%. A gauge of Chinese property shares is down 3.4% this week, taking its losses over the past 12 months to 28%, even after rallying on Friday.

 

As the cash crunch for developers worsens, so does the housing slowdown that’s become one of the biggest drags on China’s economy. Attempting to deflate a speculative market is a risky strategy that -- if uncontrolled -- could threaten Beijing’s pledge to prioritize economic stability this year. Regulators have quietly tweaked some rules to engineer a soft landing for the property industry, such as encouraging mergers and acquisitions, but so far officials have refrained from any substantive easing of curbs.

 

“While the government has become more supportive, measures have remained marginal and have not solved the liquidity crisis,” said Paul Lukaszewski, head of corporate debt for Asia Pacific at abrdn Plc in Singapore, which has portfolios with exposure to developers. “The market turmoil and ongoing uncertainty have pushed traditional investors to the sidelines.”

 

 

China Fortune Land Development Co. failed to repay a $530 million dollar bond due Feb. 28., 2021, becoming the nation’s first real estate firm to default since Beijing drafted new financing limits for the sector in 2020. Since then, at least 11 developers defaulted, according to a Feb. 3 report by Standard Chartered Plc.

 

More may follow. Property firms have to find almost $100 billion to repay debt this year, even as their income streams shrink. Sales at China’s 100 biggest developers fell about 40% in January from a year earlier, compared with a 35% decline in December, according to preliminary data by China Real Estate Information Corp.

 

Developers are selling more onshore bonds to fund project construction, but not enough to cover maturing debt. Onshore issuance by Chinese developers fell 53% in January to 23 billion yuan ($3.6 billion), while dollar note sales were down 90% from a year earlier to just $1.6 billion, according to China International Capital Corp. Net financing, which subtracts maturities from issuance, was a negative $7.3 billion, CICC analysts led by Eric Yu Zhang wrote in a Friday note.

 

 

Investors also need to worry about off-balance sheet debt. Fallen angel Shimao Group Holdings Ltd. recently proposed delaying repayment of about 6 billion yuan of high-yield trust products due between this month and August, people with the matter said this week. Its bonds sank on concern the company will prioritize these liabilities over money owed to offshore creditors.

 

Auditor resignations are sowing further doubt about the financial health of property firms. Auditors for Hopson Development Holdings Ltd. and China Aoyuan Group Ltd. resigned in late January, citing insufficient information and a disagreement over fees, respectively. Shimao’s onshore unit changed its auditor for the first time in 27 years. Failure to publish results before the Hong Kong stock exchange’s March 31 deadline may lead to long trading halts.

 

“Changing accounting firms just ahead of year-end results raises questions about the quality of a firm’s governance,” S&P Global Ratings analysts wrote in a Feb. 16 report.

 

Investor distrust of management is becoming entrenched. Rumors about Zhenro’s ability to repay a perpetual bond sent the note from near par to drop below 23 cents in a matter of days, while its shares sank amid reports holder Ou Zongrong had been forced to liquidate. The stock didn’t recover even as the company said such speculation was “untrue and fictitious.”

 

Zhenro said late Friday it may be unable to repay debt due in March, including its perpetual bond. The company had earlier pledged to redeem the securities.

 

Authorities are taking steps to ease funding restrictions for the sector, although these measures are largely targeted and incremental, rather than broad-based. The government recently issued rules to standardize the use of presale funding, banks extended more loans to the sector and some lenders in several cities have cut mortgage downpayments, according to multiple local media reports in the past week.

 

A Bloomberg Intelligence index of Chinese property stocks rose as much as 3% on Friday following the mortgage report, while high-yield dollar bonds halted their decline.

 

Even so, credit stress remains “acute” and funding channels aren’t showing much of an improvement, according to Goldman Sachs Group Inc. analysts.

 

That means defaults are likely to pile up for developers that struggle to sell assets fast enough. State-owned companies have emerged as potential buyers, though the pace of deals so far has been slow.

 

Any distressed-debt investor buying defaulted bonds now is likely to face a lengthy wait before recovery. Among the past year’s defaulters, only Fortune Land has released a preliminary restructuring framework for its debt. An estimated $48.9 billion is outstanding pending debt resolution, according to Standard Chartered.

 

While Chinese authorities have told state-owned bad-debt managers to participate in the restructuring of weak developers, it’s unclear what such support might mean for bondholders. In China’s property sector, court-led restructurings are rare, data compiled by Bloomberg show. Since 2018, 27 firms have failed to honor their bonds, and only two entered such a process.

 

“Price volatility in the sector is unlikely to subside,” wrote Citigroup Inc. strategists including Dirk Willer in a Friday note. “Even the recent rebound in new real estate loans did not provide much relief to the deteriorating sentiment.”

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Source: Bloomberg Businessweek.

Why the fallout from the Evergrande...

Why the fallout from the Evergrande crisis is worrying.

The 2020-2022 Chinese property sector crisis is an current financial crisis sparked by the financial difficulties of Evergrande Group and other Chinese property developers, in the wake of new Chinese regulations on these companies' debt limits. Following widespread online sharing of a letter in August 2021, in which Evergrande supposedly warned the Guangdong government that it was at risk of experiencing a cash crunch, shares in the company plunged, impacting global markets and leading to a significant slow-down of foreign investment in China during the period August to October 2021.

 

After rumours of financial difficulties at Evergrande surfaced in the summer of 2021, the company attempted selling assets to generate money. This strategy failed in October 2021, however. After numerous missed debt payments by Evergrande and a number of downgrades by international ratings agencies, Evergrande finally defaulted on an offshore bond at the beginning of December, after a one-month grace period had elapsed. The ratings agency Fitch then declared the company to be in "restricted default".

 

 

Thousands of retail investors, as well as banks, suppliers, and foreign investors are owed money by the company. In September 2021 the developer had 2 trillion RMB (310 billion USD) in liabilities.

 

Beijing is intervening to prevent a disorderly collapse of the indebted real estate group that could wreak havoc on the world's second biggest economy. Fitch Ratings declared that the embattled property developer has entered "restricted default," reflecting the company's inability to pay overdue interest earlier this week on two dollar bonds. The payments were due a month ago, and grace periods lapsed Monday.

 

Evergrande's apparent failure to pay that interest has revived fears about the future of the company, which is reeling under more than $300 billion of total liabilities. Evergrande is massive — it has about 200,000 employees, raked in more than $110 billion in sales last year, and owns more than 1,300 developments in more than 280 cities, according to the company.
Analysts have long been concerned that a collapse could trigger wider risks for China's property market, hurting homeowners and the broader financial system. Real estate and related industries account for as much as 30% of GDP.
 
 
There's already plenty of evidence that Beijing is taking a leading role in guiding Evergrande through a restructuring of its debt and sprawling business operations. The local government in Guangdong province, where Evergrande is based, said late last week that it would send officials into the firm to oversee risk management, strengthen internal controls and maintain normal operations. Earlier this week, Evergrande announced it would set up a risk management committee, including government representatives, to focus on "mitigating and eliminating" future risks. Among its members are top officials from major state-owned enterprises in Guangdong, as well as an executive from a major bad debt manager owned by the central government.
Chinese authorities have taken other steps as well. The central bank on Monday announced that it would pump $188 billion into the economy, apparently to counter the real estate slump.
 

The massive restructuring is going to come with some pain.

Beijing has made it clear that its priority is protecting the thousands of Chinese people who have bought unfinished apartments, along with construction workers, suppliers and small investors. It also wants to limit the risk of other real estate firms going under. Investor fears over Evergrande's default have pushed up financing costs for other developers, as yields on offshore Chinese corporate debt surge. At the same time, the government has been trying for more than a year to rein in excessive borrowing by developers — and so won't want to dilute that message. That means the government may be "happy to see the firm itself go under and investors take a haircut," said Louis Kuijs, head of Asia economics at Oxford Economics, in a research note on Friday.
 
 
Chinese regulators have blamed Evergrande's crisis on the company's leaders. Its problems were the result of "poor management and blind expansion," the central bank and the country's securities regulator said Monday in public statements, reiterating previous criticisms.
 

Spillover to growth

It's a "delicate balancing act" to allow Evergrande to fail while minimizing any economic or financial impact, especially given the broader downturn in real estate that has already seen several other developers default, including Kaisa Group this week.
New home prices in China fell in October for the second consecutive month, according to figures from the National Bureau of Statistics. The fall in September was the first in six years on a month-on-month basis. A major slowdown in the property sector, along with other factors, could drag China's GDP growth next year down to 4.3%, according to Ting Lu, Nomura's chief China economist. That's much lower than the firm's estimated growth for 2021 of 7.8%.


 

Urban China: Toward Efficient, Inclusive...

Urban China: Toward Efficient, Inclusive, and Sustainable Urbanization

 
In the last 30 years, China’s record economic growth lifted half a billion people out of poverty, with rapid urbanization providing abundant labor, cheap land, and good infrastructure. While China has avoided some of the common ills of urbanization, strains are showing as inefficient land development leads to urban sprawl and ghost towns, pollution threatens people’s health, and farmland and water resources are becoming scarce. With China’s urban population projected to rise to about one billion – or close to 70 percent of the country’s population – by 2030, China’s leaders are seeking a more coordinated urbanization process. Urban China is a joint research report by a team from the World Bank and the Development Research Center of China’s State Council which was established to address the challenges and opportunities of urbanization in China and to help China forge a new model of urbanization. The report takes as its point of departure the conviction that China's urbanization can become more efficient, inclusive, and sustainable. However, it stresses that achieving this vision will require strong support from both government and the markets for policy reforms in a number of area.
 
 

The report proposes six main areas for reform:

1. Reforming land management and institutions

  • Because most of the urban expansion in recent years was on converted rural land, the report says currently the amount of farmland available is close to the “red line” of 120 million hectares, which is considered to be the minimum necessary to ensure food security.
  • More efficient use of land will require stronger property rights for farmers, higher compensation for land requisition, new mechanisms for converting rural construction land to urban uses, and market-driven pricing for urban land allocation.
  • Legal limits should be set up on rural land taken for public purposes by local governments.

2. Reforming the hukou household-registration system to provide equal access to quality services for all citizens and create a more mobile and versatile labor force

  • The system should remove barriers to labor mobility from rural to urban areas, as well as between cities, to help boost workers’ wages.

3. Placing urban finances on a more sustainable footing, while creating financial discipline for local governments

  • The report recommends moving to a revenue system that would ensure a higher portion of local expenditures is financed by local revenues, such as property taxes and higher charges for urban services. 

4. Reforming urban planning and design

  • In cities, basing the government prices for industrial land on market value can encourage land-intensive industries to move to smaller, secondary cities.
  • Cities can also make better use of existing urban land through flexible zoning, with smaller plots and more mixed land use, which would lead to denser and more efficient urban development.
  • Linking transport infrastructure with urban centers and promoting coordination among cities would encourage better management of congestion and pollution. 

5. Managing environmental pressures

  • China already has tough environmental laws, regulations and standards, so the most important task for achieving greener urbanization is enforcement.
  • Market-based tools, such as taxes and trading systems for carbon, air and water pollution, and energy, can also be used more to meet environmental targets. 

6. Improving local governance

  • The performance evaluation system of local officials could be adjusted to give greater incentives for a more efficient, inclusive and sustainable urbanization process.
Click here to download the full World Bank report English PDF (20.66Mb)
 
Source: World Bank Group

Choppy waters for the property sector...

Choppy waters for the property sector.

The slump in China's property market looks to be accelerating with new home prices last month falling at the fastest pace on record. The sector is emblematic of problems such as rapid credit expansion and policies that promote short term growth over a more balanced economy.

 

 

House prices in the major cities surveyed by the National Bureau of Statistics, fell on average by 5.7 per cent compared to February last year. It's the sixth consecutive month house prices have fallen, including drops of 5.1 per cent in the year to January and 4.3 per cent in December. Only one city of the 70 surveyed saw any increase in house prices. Representing between 20-25% of the economy, the government however, still believes that the increased pace of urbanization will stabablize the declines this year: however, perhaps, China has simply built too much? Provincial governments meanwhile, will have to be persuaded to reduce their dependency  on their sales of state owned lands to the developers: which will be no easy task since some estimates put this at around 40% of their annual revenue. 

 

 

A further concern is the effect on property developers (still supplying over 15m housing units a year), who will be caught in a situation of tight cash flow, which is bound to churn up the shadow banking sector in China: the sector is largely built on implicit guarantees and any meaningful defaults there may jeopardize the stability of the financial system. When developers are limited access to credit, they have to reduce prices to unload their unsold housing units (and pay back their debts), which gives investors second thoughts about whether to continue plowing their money into property, starting a deflationary spiral. Falling asset prices undercut the basis for both past and future lending.

 

 

However a saving grace is that Chinese households continue to have a relatively low level of household debt, due to large mortgage down payments (China buys in cash, in full). 

 


2015 is likely to be a choppy period for China, as we see the realities of President Xi Jinping's "New Normal".

 

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