China Evergrande Group, the world’s most indebted property developer, was again flirting with a formal default on Monday night as the end of a 30-day grace period on $82.5m in debt repayments due in November loomed.
Earlier on Monday, the group’s shares tumbled in the first trading since its disclosure on Friday on concerns that it would struggle to meet a $260m guarantee obligation and that its chair had been summoned by regulators.
Evergrande’s Hong Kong-traded shares fell 19.6 per cent from their close on Friday to HK$1.81 ($0.23), an all-time low.
China’s regulators have tried to reassure domestic and international investors that they can contain the fallout from Evergrande. The central bank said after markets closed that it would free up Rmb1.2tn ($188bn) of liquidity for the banking system by cutting the share of deposits financial institutions must hold in reserve by 50 basis points, adding monetary stimulus to the slowing economy.
While the People’s Bank of China said it would not “flood” the economy with stimulus, the Chinese Communist party’s politburo pledged to maintain a proactive and “flexible” fiscal policy in the coming year, according to state media.
Chaoping Zhu, strategist at JPMorgan Asset Management, said the cut reflected the government’s desire “to reach a balance between short-term stability and long-term reforms”.
Evergrande said on Friday evening it had received a demand relating to a $260m guarantee it had issued, but gave no further details. It was not immediately clear if the guarantee had been previously divulged by Evergrande or when payment for it was due.
In its interim annual report released in August, Evergrande said it had issued financial guarantees on behalf of property buyers and business partners totalling Rmb557bn ($87.4bn).
Evergrande, whose debt crisis began to spiral out of control in September, has at least four bond repayments totalling $610m due by the end of February. The two largest payments, $255m and $235m, are due on December 28 and Jan 24 respectively. A 30-day grace period on the $82.5m in coupon payments was due to expire on Monday.
Evergrande did not say in its Friday announcement what the $260m guarantee was related to but it warned that if it failed to fulfil the guarantee, “it may lead to creditors demanding acceleration of repayment” of other debts.
In September, the Shenzhen-based developer was forced to restructure repayments to retail customers that had bought the group’s high-yield investment products. It also offered to repay investors and suppliers with completed flats rather than cash.
Evergrande later missed initial bond payment deadlines but in each case was able to meet its obligations before the end of subsequent grace periods, avoiding a formal default.
Shortly after Evergrande’s statement on Friday, China’s central bank reiterated its earlier criticism of company management, accusing it of “poor management” and pursuing “blind expansion”.
In addition to summoning Evergrande’s chair Hui Ka Yan on Friday, the Guangdong provincial government also sent a team to the group’s headquarters to supervise its finances. Hui’s fortune has fallen more than 70 per cent over the past year to $11bn.
Property prices in many of China’s largest cities have plateaued or fallen over recent months — a welcome development for officials now tasked with implementing President Xi Jinping’s new “common prosperity” policy agenda aimed at reducing social inequality.
But with China’s property sector estimated to account for as much as one-third of total economic output, there is increasing concern that the world’s second-largest economy could grow at less than 5 per cent next year.
Demand for urban land plots has fallen sharply over recent months, threatening a critical revenue source for local governments that are also struggling to finance growth-boosting infrastructure investment.
“The biggest growth headwind will be the property downturn,” said Larry Hu, chief China economist at Macquarie. “The tumbling property sector poses significant contagion risk for the Chinese economy.”
The Chinese Communist party is set to hold its annual economic planning meeting over the next few weeks. Policymakers are expected to endorse some easing measures to boost growth moderately at the session, but otherwise continue to strictly police leverage limits imposed on property developers last year.
Additional reporting by Xinning Liu in Beijing
Evergrande shares tumble as new debt payment deadline looms
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