The restructuring of Evergrande is well balanced so far


China Evergrande Group Chairman Hui Ka Yan attends a press conference on the property developer’s annual results in Hong Kong, China on March 28, 2017. REUTERS / Bobby Yip – RC170181D4E0

HONG KONG, Sept. 29 (Reuters Breakingviews) – The restructuring of China Evergrande (3333.HK) is being carried out on useful populist principles. Local governments are stepping in to make sure suppliers don’t get bullied and buyers get apartments they have paid for in advance, reports Caixin. The big investors in the troubled real estate developer will therefore incur significant losses, and that’s okay.

The company declared 165 billion yuan ($ 26 billion) in advance payments as of June 30. 951 billion yuan of trade debt is also coming. Together, this far exceeds the $ 20 billion owed to Evergrande dollar bondholders. The numbers reflect founder Hui Ka Yan’s strategy of shifting liabilities from state-controlled banks to smaller, less powerful entities. The scheme removed risky debt from lenders’ balance sheets, but Evergrande also stopped paying vendors to save money – then contractors stopped building. It also began to default on wealth management products sold to ordinary investors and to its own employees. Read more

These forms of financing are points of great political sensitivity; no city official wants to see televised footage of rabid citizens outside their desks, lamenting about putting their savings in an apartment Evergrande can’t finish or a wealth management product he can’t afford. The authorities also do not want a wave of bankruptcies in their local construction industry. At the same time, the overall market has started to freeze as buyers question whether other developers, most of whom are also heavily in debt, will be able to deliver the promised properties.

This makes the appeal to Beijing easier, which tends to be driven by what’s best for at least 51% of the population. It is also arguably better than the way US banks were bailed out during the financial crisis when many owners suffered.

There is a whiff of moral hazard to save investors who have bought high yielding WMPs from Evergrande. On the other hand, many of them were forced to do so. And it would be even more counterproductive for regulators, who have tried to reduce risk in the system, to save investors who have traded junk stocks and bonds issued by a notorious financial engineer thinking it was too much. big to fail. Sometimes political desirability and financial common sense are aligned.

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NEWS CONTEXT

– China’s central bank pledged to protect consumers exposed to the housing market on September 27 and pumped more liquidity into the banking system as market concerns intensify over the ability of real estate developers to survive to pressure from Beijing to curb their level of debt.

– On the same day, shares of China Evergrande’s electric car unit fell 26% after warning it faced an uncertain future without a rapid injection of cash. The Hong Kong-listed company added that it had canceled plans to raise funds via a listing on a mainland stock exchange.

– Chinese financial magazine Caixin reported on September 27 that local governments have started to take control of part of Evergrande’s revenue to ensure that building local projects, many of which have been pre-sold to local buyers, is completed and that funds are not transferred to other regions.

Editing by Jeffrey Goldfarb and Katrina Hamlin

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