As Evergrande prepares to sell off its property management arm, China’s mitigation strategy risks draining foreign bondholders

Evergrande HQ

While the Chinese group Evergrande continues to default on its debts to foreign lenders, the Chinese company and government are prioritizing domestic stakeholders.

Evergrande, the world’s most indebted developer with liabilities of $ 305 billion, halted stock trading for himself and his property management subsidiary, Evergrande Property Services, before what he called the announcement of ‘a pending “major transaction”. Reuters reports. Chinese state media reported that the transaction would sell a controlling stake in Evergrande Property Services to another Chinese developer, Hopson Development Holdings.

The sale, which is said to be worth up to $ 5 billion, would be Evergrande’s biggest move to raise cash to pay off some of its debt, Reuters reports. It would also reflect the Chinese government’s preference to transfer as many activities from Evergrande to financially sound companies, The Wall Street Journal reports. Hopson, which reported $ 2.1 billion in first-half revenue, is considerably smaller than Evergrande, but profitable and owns more assets than debt, in line with China’s directive to deleverage the real estate market from the country.

Deprived of its ability to raise more debt capital, Evergrande was unable to pay various obligations, but the People’s Bank of China prioritized repaying the developer’s suppliers and contractors, as well as homebuyers who have made down payments on units under construction. and retail investors who have purchased high yield investment products from Evergrande, Bloomberg Reports.

A state-run entity bought Evergrande’s stake in a national commercial bank on condition that Evergrande use it to pay priority groups, while the PBOC injected $ 123 billion in short-term capital into the domestic financial market to alleviate liquidity problems, Bloomberg reports. . All the while, state finance officials have called on banks to ease credit for homebuyers and support the nation’s real estate sector.

Reserved area

A project developed by Evergrande in the Chinese city of Yuanyang

Every decision that Chinese leaders have made so far indicates that its strategy is to let Evergrande fail and contain the fallout so that it does not sink the entire real estate sector, which represents a disproportionate share of the economy. across the country, Bloomberg reports. The focus on domestic financial health will likely mean that foreign financial entities that bought Evergrande bonds could see the value of those bonds wiped out, analysts told Bloomberg.

The pain that will be felt in financial markets outside of China could be determined by the country’s success in limiting contagion from the impending Evergrande collapse. Another Chinese developer, Fantasia Holdings Group, has announced that it has failed to repay $ 206 million of a $ 500 million loan taken in 2016 and maturing on Monday, Reuters reports.

Chinese state finance officials have ordered its banks not to stop lending to real estate companies all at once, but Fantasia is not the only developer to report similar or at least partially caused financial distress. by the situation of Evergrande. If the country lets these companies fail, redistributes their plans to other companies, and steps in to ensure that domestic investors are unharmed, then more European and American financial entities risk seeing their bond investments in Chinese real estate go. in smoke.

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