Investor confidence in China Evergrande Group is plunging amid mounting signs that the world’s most indebted developer faces a cash crunch.
The property giant’s stock tumbled to a four-year low on Tuesday, July 20, extending its two-day loss to 23% and wiping out a surge last week that was fuelled by hopes for a special dividend. Several of Evergrande’s local and offshore bonds sank to all-time lows, with its 2025 dollar note falling to 54 cents. Bonds of other junk-rated Chinese borrowers also dropped as worries about contagion increased.
Long-simmering doubts about Evergrande’s financial health intensified this week after the company had a US$20 million bank deposit frozen by a local court and was hit with a property sales ban by a city government alleging it had failed to set aside enough funds in escrow accounts.
While the city later removed the ban, providing some relief to Evergrande’s stock, investors are worried the developer isn’t selling properties and other assets fast enough to repay liabilities that swelled to the equivalent of US$301 billion at the end of 2020.
“Evergrande’s debt risk is quickly piling up,” said Ma Dong, a partner at Beijing-based bond fund BG Capital Management.
While Evergrande has emerged from past liquidity crises intact, some investors are betting this time will be different as Chinese President Xi Jinping’s government becomes more tolerant of defaults.
Some large state-owned banks have already reduced their lending to Evergrande, though the developer has said repeatedly that its relationships with creditors are normal.
The risk is that a major payment failure at Evergrande ripples through China’s financial system, eroding confidence in other highly leveraged property companies, shadow lenders and even some banks.
Officials from China’s top financial regulator told Evergrande founder Hui Ka Yan at the end of last month that he should solve his company’s debt problems as quickly as possible, emphasizing the need to avoid major economic shocks, people familiar with the matter told Bloomberg News earlier this month.
The frozen bank deposit has made some creditors question whether Evergrande still enjoys the implicit support of Chinese authorities, said Omotunde Lawal, head of emerging-market corporate debt at Barings UK.
“The key thing to watch now is if other banks or trust companies rush to demand loan repayment or freeze assets,” Lawal said, adding that any news of successful asset sales by Evergrande may help calm investor nerves.
Bloomberg reported on Monday that Evergrande is considering an initial public offering in Hong Kong for its bottled water business, though the sale would only raise a few hundred million dollars and take place next year.
The Shenzhen-based developer has some US$80 billion worth of equity in non-property businesses that could help generate liquidity if sold, Agnes Wong, a Hong Kong-based analyst with BNP Paribas SA, wrote in a June report.
Whether Evergrande can secure attractive prices for those assets remains to be seen. All of its key listed units have tumbled in recent weeks, with the market value of Evergrande Property Services shrinking by about US$17 billion since its February high. Evergrande New Energy Vehicle is down more than US$60 billion in the period.
This week’s rout began on Monday morning, after traders circulated a court ruling on a loan dispute between Evergrande and China Guangfa Bank Co. The court froze a 132 million yuan (US$20 million) deposit held by Evergrande’s main onshore subsidiary, Hengda Real Estate Group, at Guangfa Bank’s request.
Late Monday, news emerged that the Chinese city of Shaoyang had halted sales at two of Evergrande’s residential projects. Shaoyang’s government said it took the action after Evergrande didn’t deposit enough pre-sale funds into escrow accounts and intentionally evaded supervision, according to a statement posted on the local housing department’s website.
On Tuesday, Shaoyang authorities said they had allowed Evergrande to resume sales at the two projects after the developer transferred more money into the accounts. Evergrande’s stock, which sank as much as 16% earlier in the day, pared its decline to 8% as of 2:28 p.m. in Hong Kong.
Residential sales are a key source of cash flow for Evergrande. Chinese developers sell residential properties before construction is completed, but are required to deposit funds from the transactions in supervised bank accounts. The escrow accounts are designed to prevent cash-strapped builders from abandoning projects.
