Another tough week for China and the stricken Chinese property group Evergrande with an $US80 million interest payment due to be paid and the company making it clear it can’t or won’t be able to find the money.
The huge property company’s struggle to survive is also part of the reason why China’s property sector has been hit and why iron ore prices have collapsed, hurting Australia’s trade account and revenue and earnings for giants like BHP, Rio Tinto and Fortescue Metals.
Iron ore prices peaked at $US237 a tonne for 62% Fe fines from the Pilbara on May 12 and were priced at $US101.5 on Friday – a fall of 57%.
Evergrande shares are down 80% since the start of the year, the price of other Chinese developers have fallen as well. It’s problems have infected China’s huge property sector, cutting the level of activity.
While the crackdown on emissions by the Chinese government at national, provincial and local levels has played a big part (steel output is only down 16% since May and iron ore imports haven’t fallen dramatically), some analysts point to the collapse in the price of Evergrande shares as a proxy for the fears concerns about what would happen to steel consumption if the property group fell over.
Property construction remains the single biggest user of steel (mostly rebar and long beams or H beams) and if banks cut credit to the sector in the event of the failure of Evergrande, it could have a catastrophic short term crunch on steel demand, production and iron ore (and coal) consumption.
So there is more riding on this company’s future than just a big property collapse – it could damage financial groups, property companies and throw thousands of people out of work and ruin tens of thousands of property purchasers.
That’s the danger, but with most of the week ahead involved in the Mid-Autumn holidays, its highly likely an excuse will be found to either postpone the repayment or roll it over via a period of grace or some other arrangement to give the company and the Chinese government and the various banks and other bodies time to strike a deal to support the broken group.
Friday saw Evergrande shares fall another 3.4% in Hong Kong to take the week’s loss to 30% and more than 80% from the start of the year.
Investors rightly know that it is a black hole just chewing up money, time and effort and it is now up to the Government of Xi Jinping to decide whether to support it and stop any contagion damaging China’s financial system and property sector, or to let it go and risk a repeat of Lehman Brothers collapse in September 2008 which ignited the GFC and crunched the global economy.
But Xi Jinping and his government already have an enormous credibility problem – after all Beijing’s clampdowns on big tech firms like Alibaba and Tencent and a host of other businesses has already wiped nearly a trillion dollars off the value of Chinese and Hong Kong markets so far this year – especially Hong Kong.
So far the potential damage from Evergrande has largely been confined to China’s other highly-indebted “high-yield” firms which have also slumped, but Hong Kong’s Hang Seng index hit another 10-month low on Thursday and is down 8% this year (and 4.9% last week, while Wall Street is up 18%.
The collapse in the share prices of companies with casinos in Macau where a Xi Jinping crackdown looms in 2022 helped drive the Hang Seng and confidence lower last week, on top of the growing Evergrande debacle.
Back in April Evergrande’s bonds were trading around 90 cents on the dollar, now they are closer to 25 cents which puts them in the range of junkier than junk and on the verge of default.
In fact the group has been hit by recent ratings downgrades, with both S&P Global Ratings and Fitch Ratings warning of the risk of default.
AMP Chief Economist, Shane Oliver says Evergrande is responsible for around 6.5% of total Chinese property sector debt and 10% of its high yield offshore market, so “its collapse and liquidation could have a systemic impact like that of Lehman Brothers in 2008 in terms of a flow on to the Chinese property and financial sectors and its economy.”
“For this reason, a government directed restructuring is more likely but there could be a few big bumps along the way,” he wrote at the weekend.
According to the letter Evergrande sent to the Chinese government late last year, its liabilities involve more than 128 banks and over 120 other types of institutions.
Major US financial firms including BlackRock and Goldman, and Blackstone, met with officials from China’s central bank and its banking and securities regulators late last week. But, being foreigners their views will almost certainly be ignored.
In an August report, S&P estimated that over the next 12 months, Evergrande will have over 240 billion yuan ($US37.16 billion) of bills and trade payables from contractors to settle with around 100 billion yuan of that due this year.
Ratings agency Fitch said banks may also have indirect exposure to Evergrande’s suppliers — the developer’s total trade payables stood at 667 billion Chinese yuan (That’s close to $US100 billion), according to Fitch’s analysis, Reuters reported.
More worrying for the company and the government was the statement on Saturday from Evergrande that revealed six unknown executives had cashed in some of their holdings of the company’s investment products in advance earlier this year.
Reuters reported that between May 1 and September 7, the six executives made early redemptions of 12 investment products, Evergrande said in a statement on its website, without identifying the executives or giving details on the nature of the products.
“Regarding the early redemption of Evergrande wealth investment products by some managers, the group company views the matter seriously,” the company said.
Evergrande said it had requested that all the funds redeemed by the six managers in advance be returned within a certain time frame.
Severe penalties would also be imposed, it said.
That disclosure seems too little, too late.
