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Friday, September 22, 2023

China Evergrande’s U.S. Bankruptcy Filing Amidst Escalating Property Crisis

ChinaChina Evergrande's U.S. Bankruptcy Filing Amidst Escalating Property Crisis

China Evergrande Group (3333.HK), once a leading developer in the country, has taken a significant step towards addressing its debt crisis by filing for bankruptcy protection in a U.S. court. This move is part of what is considered one of the largest debt restructuring activities on the global stage. The ripples of China’s intensifying property sector downturn and the impact on its slowing economy are being felt around the world.

China Evergrande had been at the forefront of the country’s real estate industry. However, recent events have turned it into a symbol of China’s massive debt crisis in the property arena. This sector, which contributes to nearly a quarter of China’s GDP, started exhibiting alarming signs in 2021 when a liquidity issue was first observed.

Under Chapter 15 of the U.S. bankruptcy code, Evergrande is seeking protection. This code offers a shield for non-U.S. based companies undergoing restructuring, preventing their creditors from pursuing lawsuits or freezing their assets within U.S. territories. Although the filing primarily serves a procedural role, it’s a mandatory step in the restructuring procedure under U.S. regulations. Two individuals privy to this matter have confirmed this, although they chose to remain anonymous given the subject’s delicate nature. While Evergrande refrained from commenting, their offshore debt restructuring stands at a staggering $31.7 billion. This amount includes bonds, collaterals, and repurchase commitments. A meeting with creditors regarding their restructuring approach is slated for later this month.

The broader picture shows a worrisome trend: many Chinese property developers have defaulted on their foreign debt responsibilities. This sequence of events has left behind uncompleted residential projects, plummeting sales, and critically dented investor trust. These defaults are a significant blow to China, the world’s second-largest economy.

The ramifications are not limited to developers and investors. There’s a growing fear of the property crisis becoming a contagion, potentially destabilizing an already fragile economy grappling with weak local consumption, stalling factory output, rising joblessness, and dwindling demand from international partners. This is accentuated by news like a prominent Chinese asset manager failing to meet repayment obligations on certain investment portfolios and flagging a liquidity issue. Country Garden (2007.HK), the top private developer in the country, recently highlighted a severe liquidity challenge, adding to the overall gloom.

In a setting where property investment, housing sales, and new projects have been shrinking for over a year, such news is alarming. This economic trajectory has led global firms, including Morgan Stanley, to revise their growth projections for China. The financial giant now anticipates China’s GDP to expand by 4.7% this year, a decline from its prior 5% estimate. China had set an annual growth target of 5%. However, many economists believe that without substantial interventions from Beijing, achieving this figure might be a tall order.

China’s economic uncertainties, combined with its property market issues and the absence of decisive stimulus actions, have cast a shadow over international financial markets. For instance, Asian shares have been set for a 2.8% loss for the third consecutive week. Simultaneously, China’s blue-chip index (.CSI300) and Hong Kong’s Hang Seng Index (.HSI) fell by 0.5% and 1.3%, respectively.

Analysts are speculating that China might reduce lending benchmarks in its upcoming monthly review. A significant drop in the mortgage reference rate could be on the cards, aiming to rejuvenate credit demand and bolster the beleaguered property industry. The country’s central bank has already signaled possible adjustments to property policies in its recently released second-quarter monetary policy report.

Since the debt turbulence began in 2021 with Evergrande in the spotlight, companies representing 40% of the nation’s housing sales have defaulted. Most of these are private real estate developers. In response to the evolving situation, Longfor Group (0960.HK), China’s second-largest private property developer, announced strategies to expedite its profit structure to better align with the shifting demand and supply dynamics in the property market.

Earlier this year, Evergrande unveiled its offshore debt reconfiguration plan, anticipating that this would pave the way for a systematic resumption of operations and cash flow. The developer is now rallying creditor support to finalize the process. An affiliate, Tianji Holdings, also sought Chapter 15 protection recently in Manhattan’s bankruptcy court. Evergrande is keen on getting approval for restructuring discussions underway in multiple jurisdictions, including Hong Kong, the Cayman Islands, and the British Virgin Islands, with a Chapter 15 recognition hearing proposed for September 20.

History seems to be repeating itself. In 2021, another Chinese developer, Modern Land (China) Co. Ltd (1107.HK), which couldn’t fulfill its offshore bond payment obligations, lodged a petition under Chapter 15 of the U.S. bankruptcy code in New York.

Lastly, trading of China Evergrande shares has been on hold since March 2022. Its subsidiaries have seen a significant drop in stock values, with shares of Evergrande Services (6666.HK) and China Evergrande New Energy Vehicle Group (0708.HK) plunging dramatically. The entire situation underscores the fragility and interconnectedness of global financial systems, emphasizing the need for careful monitoring and proactive interventions.

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