Another Chinese Developer's Stock Collapse Deepens Worries About Major Economic Crisis
Stock markets all over the world have suffered major declines in the past few days, in part based on the perceived risk of ripple effects from the Evergrande situation, Bloomberg reports. Unsurprisingly, the hardest-hit companies have been others in Chinese real estate. Shanghai-based Sinic Holdings Group Co. halted trading on Monday after its share value plunged 87% during a spike in transaction count, Bloomberg reports.
Sinic may be one of the worst cases because, like Evergrande, it has a major bond coming due — in Sinic's case, a $246M bond due in mid-October that credit rating agency Fitch has changed to a negative outlook, Bloomberg reports. Evergrande has two different bonds coming due on Thursday, for which bondholders have so little confidence in repayment that they were trading at 30% of face value on Monday, Bloomberg reports.
With over $300B in debt, Evergrande is the world's most indebted developer, Newsweek reports. Years of continued borrowing alongside generous dividends to shareholders have left an uncomfortably high percentage of Evergrande's assets tied up in its properties, leaving it with not nearly enough liquidity to pay off its various debts. That strategy was a common one in China's real estate market where values spiraled upward in recent years, prompting President Xi Jinping to implement a crackdown on borrowing intended to reduce overall debt risk in the Chinese market and cool down real estate prices.
As it continued to spend without sufficient liquidity, Evergrande had been paying suppliers and vendors with commercial paper rather than cash, meaning the crumbling of its value and credit will make it much more difficult for those suppliers to be repaid, which could cause financial problems at those companies in short order, Mish Talk reports. The name of Lehman Brothers, the U.S. financial giant whose collapse helped trigger the Great Financial Crisis in 2008, has been coming up more and more as a comparison with Evergrande.
As Evergrande's crisis has begun to affect the broader markets, Xi and the Chinese government have been quiet about any potential plans to step in, prompting speculation that the government may not want to backtrack on its monetary policy to prop up its second-largest developer, Bloomberg reports. The People's Bank of China has already injected $14B into markets through reverse repurchase agreements to help calm matters, but should Evergrande default on multiple debt obligations, more will be needed.
Even if Evergrande's worst-case scenario doesn't come to pass, the real estate market now seems unlikely to emerge unscathed. In addition to the value drop at other real estate companies, Evergrande has begun offering stakes in its own properties at deeply discounted rates to investors for one of its overdue wealth management products in lieu of cash, Bloomberg reports.
For any of the roughly 70,000 investors owed a total of $6.2B that accept the offer, they can take residential properties at a 28% discount, office real estate at a 46% discount, and retail and parking properties at a 52% discount. Evergrande's balance sheet may be helped by a large number of investors choosing that option, but it may depress real estate values across China at the same time.