Evergrande told to fix debt in rare China rebuke; bonds drop

BEIJING (BLOOMBERG) – Financial regulators in Beijing told China Evergrande Group to resolve its debt problems and refrain from spreading “untrue” information, issuing a rare public rebuke of the developer as it struggles to stave off a liquidity crisis.

The People’s Bank of China and the China Banking and Insurance Regulatory Commission released a joint statement on Evergrande on Thursday (Aug 19) after a meeting with the developer’s executives. The pointed tone of the comments exacerbated a sell-off in Evergrande dollar bonds, with its 8.25 per cent note due 2022 falling 3 US cents on the dollar to 45.5 cents.

Hopes for some sort of government bailout for Evergrande have been fading in recent weeks, sending the company’s bonds and shares tumbling. Thursday’s statement is the clearest sign yet that Chinese authorities are losing patience with the company, which poses a potential systemic risk to the world’s second-largest economy. With more than US$300 billion (S$409.4 billion) of liabilities, Evergrande’s fate has broad implications for China’s US$50-trillion financial system and the nation’s banks, trusts and millions of homeowners.

“It shows top regulators want to avoid letting Evergrande’s risks translate into financial system risks,” said Mr Yan Yuejin, research director at Shanghai-based E-house China Research and Development Institute. “There could be further regulations to curb debt risks related to developers.”

This is not the first time regulators have urged the developer to fix its debt problems. At a meeting in Beijing in June, officials at the Financial Stability and Development Committee asked billionaire founder Hui Ka Yan to consider bringing in strategic investors to stabilise the property giant, emphasising the need to avoid major shocks to the economy, according to a person familiar with the matter.

Shares of Evergrande slid 4.8 per cent in Hong Kong trading on Thursday before the statement, falling to the lowest level since January 2017. The world’s most indebted developer has lost two-thirds of its value this year.

The Chinese government has so far kept quiet about whether it will provide financial support for Evergrande, leaving investors to guess at its odds of becoming the next casualty of President Xi Jinping’s campaign to rein in moral hazard and tighten the state’s grip on key sectors of the economy.

Cut debt

The developer announced at the end of June that it had cut interest-bearing debt by about 20 per cent in the first half to US$88 billion. That enabled it to meet one of China’s “three red lines”, a trio of metrics that policymakers have used to encourage the property industry to deleverage.

Evergrande has been selling assets including stakes in units to fend off a cash crunch. The company is in talks with Xiaomi Corp and Shenzhen state-backed investment firms to sell part of its 65 per cent stake in China Evergrande New Energy Vehicle Group, Reuters reported on Thursday, citing three people familiar with the matter.

Still, Evergrande’s debt-reduction efforts have failed to convince investors, partly due to concerns that the company is simply shifting obligations to other parts of its balance sheet. The developer’s total liabilities – which include short-term payables such as commercial bills – grew to a record 1.95 trillion yuan (S$409.8 billion) last year. Several Evergrande units have fallen behind on commercial bill payments this year.

A bailout of China Huarong Asset Management announced on Wednesday did little to alleviate investor concern on Evergrande.

Any move to significantly dilute shareholders including Mr Hui, who owns a controlling stake in the developer, or impose losses on creditors could undermine confidence in other financially stressed companies across China. Conversely, a less onerous capital injection from private investors or government-linked funds could trigger a significant relief rally.

“The key is regulators are on top of the situation,” said Mr Daniel Fan, a credit analyst with Bloomberg Intelligence.

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