Fears of contagion from the potential collapse of struggling Chinese real estate giant Evergrande sent real estate shares in Hong Kong plunging on Monday, with the company expected to default on upcoming interest payments this week.
The company, one of the country’s largest developers, is on the brink of collapse as it crumbles in debt of more than $ 300 billion, raising fears of a spillover into the national and global economy.
The crisis has sparked rare protests outside the company’s offices in several Chinese cities from investors and suppliers – some of whom claim they are owed up to $ 1 million – demanding their money.
Adding to the anger, it emerged over the weekend that six top executives would face “tough penalties” for buying back financial products before telling retail investors the company couldn’t pay them on time.
The company said it must return the money it bought “within a deadline”, adding that its investment arm must “strictly follow the announced repayment plan to ensure fairness and impartiality.”
The crisis sent the company’s shares plunging to around 17% on Monday, leaving it down about 90% since the start of the year.
Other real estate companies were also in the crosshairs, with Henderson Land losing and New World Development each around 12% less. Sun Hung Kai Properties lost nine percent.
Meanwhile, insurance giant Ping An lost about eight percent. China Minsheng Bank, Agricultural Bank of China and Industrial and Commercial Bank of China all fell around 3-5%.
The dash for the exit left the Hang Seng Index down more than four percent.
Analysts say a lack of commentary from Beijing and a holiday in China only adds to the uncertainty.
BOCOM International Holdings analyst Philip Tse warned “there will be further downsides” unless executives give a clear signal on Evergrande or relax its crackdown on the real estate industry, Tse said.
The focus is now on the company’s repayments, with interest on bank loans due Monday and two bonds on Thursday.
– Mountain of debt –
However, a creditor quoted by Chinese financial outlet Caixin Global on Monday estimated that there is a “99.99%” chance that Evergrande will not be able to pay interest due in the third quarter.
At the end of June, the real estate developer had total liabilities of nearly 2,000 billion yuan ($ 309 billion) – roughly the equivalent of 2% of China’s GDP – with an unknown amount of debt excluding balance sheet.
The giant mountain of debt contributed to Evergrande’s voracious expansion, which began with a real estate boom in the 1990s and lasted until Beijing decided to reduce leveraged growth in the sector by introducing restrictions in 2020.
Although predominantly a real estate company, the group has also embarked on full diversification, buying the Guangzhou FC football club, opening amusement parks, creating Evergrande Spring mineral water and also investing in the tourism, digital operations, insurance and health.
But it came off as Beijing cracked down on developers in an attempt to force them to offload debt, introducing “three red lines” to reduce leverage last year.
He introduced a ban on the sale of properties before their completion – an important part of Evergrande’s business model.
– ‘Huge pressure’ –
Experts say the company still has over a million customer prepaid units to build, adding to the sense of apprehension among Chinese investors, many of whom are first-time buyers.
The company admitted last week that it was under “enormous pressure” and may not be able to meet its obligations. Its credit rating has been downgraded several times by rating agencies.
With access to loan markets now cut off and no money to complete developments and pay off debts, the company has tried new ways of meeting its responsibilities, including providing parking spaces and unfinished properties.
Yet as leaders seek to curb excessive risk-taking, there is a general belief that they will work to prevent the problem from becoming unmanageable and digging a hole in the already stammered economy.
“The central government’s priority to social stability makes restructuring with discounts for debt holders likely, but the spillover to other listed real estate developers means there is likely to be a real economic impact on the real estate sector,” National Australia Bank’s Tapas Strickland said.
“To what extent Evergrande is slowing the growth momentum remains unclear.”