- Just eight months after the disaster from the financial collapse, Chinese billionaire Hui Ka Yan finds himself back in crisis-fighting mode.
Resurgent concerns about the health of China Evergrande Group, Hui's flagship property company, have pushed its stock up from March 2020 to within a hair's width of the lowest level. Bondholders are also furious for the exit, spooked by miss payments at the developer's affiliates and a report that regulators are probing Evergrande's ties to an obscure bank in north China.
It is yet another dramatic turn of events for a tycoon whose ups and downs are volatile even to the standards of China's volatile markets. At $9 billion, Hui's net worth has declined by about a third since signing a deal with investors in September to prevent a cash crunch. According to the Bloomberg Billionaire Index (Billionaires) it’s down by more than half from a 2020 peak.
The turmoil has the potential to spread far beyond our borders. Evergrande with 1.95 trillion yuan of obligations - including dollar bonds which sit in portfolios from London and New York - Evergrande is the world's most important real estate company and one of the most systemically important borrowers in China.
If Hui fails to revive investors confidence, a liquidity crisis could ripple through the nation's financial system and beyond. The risk has grown so serious that Chinese regulators recently ordered banks to conduct a fresh round of stress tests on their exposure to the junk developer If it was in trouble, it would clearly have a significant impact on the Chinese housing market and general economy, said Lan Deng, a professor at the University of Michigan who studies real estate development in China and the US. Not only would it expose its lenders to more financial risk, there could also be possible chain effects spreading across the different sectors of the Chinese economy, given how deeply the economy is linked to real estate development.
Evergrande didn't respond to a comment request on Thursday. It has stated earlier this week that it had taken the right to arrange payment for late commercial paper at its affiliates and that its dealings with Shengjing Bank Co. a loan which it owns a stake are consistent with Chinese law.
The developer has suspended its use of sales discounts on certain properties and this week defended his buying back shares, picking up roughly US $475 million on Monday. It is expected to meet at least one of China's key red lines for real estate companies - known as the 'three red lines'-- by the end of this month.
Evergrande has options as he tries to put Hui on a sounder financial footing. His empire has raised in recent months billions of dollars by selling equity in its property management unit and electric vehicle unit, which is more valuable than Nissan Motor Co. despite having yet to sell a single car. Evergrande has several other units that could be candidates for listings, including its bottled water affiliate and an online home and car selling platform.
It also benefits from a Chinese property market, said Maggie Hu, professor of real estate finance at the Chinese University of Hong Kong. The company dipped in cash in May as the contract sale took 6%. It can cause even more cash by depressing acquisitions of land and transferring investment assets and tourism assets, said Edwin Fan, a director at Fitch Ratings.
Evergrande's fate may ultimately depend on whether Chinese authorities allow banks to continue to fund it. According to analyst Kristy Hung, as much as 81% of the company's debt due in 2021 is in the form of bank loans.
A near-term blowup appears unlikely, given that authorities are likely putting a premium on stability during the run up to the 100th anniversary of the Communist Party on July 1. Officials in Guangdong Province help the Evergrande development to arrange the deal last year that allowed the developer to avoid a cash crunch. The group photo taken to announce the agreement showed Hui in the middle of 35, smile and clapping strategic investors who had just waived their right to force a $13 billion repayment.
This said, senior Chinese leaders have demonstrated increased willingness to let moral businesses fail as they try to control high stress.
HNA Group Co., once viewed as one of China's most well-connected conglomerates, is now in the midst of a Court-led restructuring that involves 1.2 billion yuan of claims from creditors. Several Chinese property companies have defaulted in the last few months and questions continue to swirl over the future of Chinese state-owned China Huarong Asset Management Co., the bad-debt manager that spooked investors by failing to report its 2020 results. Both Evergrande and Huarong have about $21 billion of dollar bond notes outstanding.
Evergrande turned from a grubby Guangdong developer into one of the world's biggest real estate behemoths in part by taking advantage of creditors' assumption that his company was too big to fail. This bet now no longer looks like a sure thing.
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