Evergrande just tip of iceberg

Wednesday 10 Nov 2021

 
It is now clear that the Evergrande (terribly ironic name) is merely the tip of a very large dept ‘iceberg’. Reporting by The Guardian indicates one third of China’s property developers will struggle to repay their debts in the next 12 months, according to a new report, as the sector reckons with increasingly serious headwinds from falling sales, restricted access to credit and a wider downturn.

Even if the embattled developer Evergrande manages to meet its latest debt repayment on Friday and head off a potentially disastrous default, analysts at the credit rating agency S&P warned that many other property companies could be heading towards bankruptcy.

The financial contagion sweeping through the sector represents a serious risk for China – and the global economy – as its investment and construction driven model of growth begins to creak under the strain of mind-boggling debts.

China has suffered housing market downturns before but this one is set to be “unusually intense”, S&P said. Although Evergrande has emerged as the symbol of the debt-laden structure with liabilities of $300bn at home and abroad, the Chinese property sector as a whole owes an estimated $5 trillion, according to analysts at Nomura. That is one-third of the country’s entire GDP and roughly equivalent to the whole output of the Japanese economy, the world’s third largest.

Property companies must come up with $92bn as bond payments mature in the next year. This task has been made much more difficult because many were cut out of conventional borrowing channels after Xi Jinping’s “three red lines” crackdown on lending to the sector. Some have seen their credit-worthiness ratings cut to “B” or below, which denotes that the company is vulnerable.

Bondholders have been trying to extract information about Evergrande’s financial situation since its financial death spiral become clear in September when it admitted that it might not be able to meet all its debts, which include an obligation to finish up to 1.6 million homes in China that it has already taken payment for.


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