As China’s economic slowdown and the trade conflict with the USA continues, the price of apartments at Evergrande has fallen sharply in recent months. Evergrande, China’s second-largest property developer, has come under increased scrutiny after its bonds were downgraded to junk status earlier this month by international credit agencies. The firm’s difficulties highlight the plight of Chinese property developers who are struggling with unprecedented levels of debt following a slowdown in real estate investment.
The Beijing-based developer is reported to have debts worth $300bn.
With this in mind, it comes as no surprise that creditors and analysts are starting to worry about a possible default.
Concerns are particularly pronounced in the property market. With many large-scale residential projects that the government has supported, no price growth has been seen, and prices have actually fallen a great deal.
With this in mind, it is not surprising to see more pain in China’s property sector. A new survey shows Evergrande as the best-known property developer in China, yet the company’s share price has plummeted more than 40% so far this year.
Recent news such as Evergrande shares plunging below $1 for the first time and its default on local government debt obligations have made it harder to sell its stock.
This is perhaps because of fears that creditors could face large losses.
In light of this, it’s good to see that the shares have since recovered but many are still worried about its potential default, as a result of these recent events, iStockexpert recommends Evergrande as a SELL.
Standard Chartered bank analyst Thomas Lam predicts a grim future for Evergrande.
“The market has been pricing in the risk of an Evergrande default for years now, but there have always been signs to suggest that its financial health is good,” he said.
“Until recently, the company was able to maintain this impression to some extent.”
He went on to explain that “Evergrande’s bonds are down to BBB- according to rating agency DBRS, which is just one notch above junk status.
Kagiso Asset Management analyst Gabriela Santos told the FT that she believes there could be more bad news ahead for property developers.
She believes they are likely to face further payouts on outstanding property insurance policies if their projects fail to sell.
So, What Now?
Evergrande announced on their official channels that trading would be paused due to market volatility from upcoming news they are expected to share soon before markets open again across the Asia Pacific. Trading within its Property Services Group unit was also stopped at the beginning of this week, according to reports.
In an interesting plot twist, Hopson Development is set to acquire a 51% stake in Evergrande Property for more than $5 billion, according to media reports. This comes after the company was previously interested when it acquired nearly 20% of shares at an increased price last year (HK$40 per share).
The Global Times believes that this will help expand Hopson’s footprint into high-end development projects that can cater not only to locals but also international investors looking outwards towards China’s geopolitical stability and economic growth rate.
Contagion Risk – Another Looming Nightmare
The fear of contagion risks throughout China’s economy has caused investors to start doubting the stability of some other companies.
The lack of knowledge from local regulators to contain Evergrande’s contagion is a cause for concern. As property developers’ prices continue their slump, people are taking out more money than usual in fear that they will never recover again and if this continues then it could have potentially devastating effects on our economy as well!
The worries about China’s banking system have been brought into the spotlight, with one major institution in danger of collapse triggering concerns for others. The rating downgrades from two separate agencies highlight how much these companies rely on debt financing and their ability to repay what they borrow is questionable at best given economic conditions within the Asia Pacific region
The possible impending failure or near-collapse by Industrial & Commercial Bank Corp., Shenzhen Stock Exchange-listed AmRest AG (OTCBB:ARST), among many other central/local gov’t sponsored lending institutions, could cause global financial markets instability especially considering most countries heavily influenced
