Beijing is scrambling to protect millions of Chinese homeowners from the collapse of Evergrande after the teetering Chinese property behemoth missed a bond payment deadline.
Regulators acting for the Communist regime have stepped in to ensure that Evergrande focuses on completing developments across its 2.3bn sq ft of land reserves, rather than diverting funds paid by property buyers elsewhere.
The company is yet to make an announcement regarding the interest payment on the offshore bonds, which was due on Thursday. If the money is not repaid within 30 days of its deadline, Evergrande will be considered in default.
Local governments have been told to place funds for Evergrande projects into escrow accounts outside the developer’s direct control amid concerns the company could set off a damaging chain reaction if it suffers an uncontrolled collapse.
The business is China’s second-largest property developer and has helped to drive a years-long building boom fuelled by millions of eager buyers and retail investors.
However, this breakneck growth was fuelled by a mountain of around $300bn (£219bn) of debt. The company was forced to reveal last month that it was on the brink of a default. Shares have crashed 83pc in the last year.
Earlier this week, Evergrande staved off a default by striking an agreement with domestic bondholders over interest payments worth $35.9m (£26m).
However, there are fears that a failure to contain the crisis risks derailing China’s economy and causing long-term damage to its property market.
Analysts at Nordea said they expected Evergrande to be quasi-nationalised by the Beijing regime, avoiding an international fallout.
They said: “The Chinese Communist Party will try to contain the domestic risks by ‘bailing out’ local lenders and contractors by slowly but surely transferring Evergrande’s assets to a quasi-public entity over the coming years.”
However, Citibank analysts warned of substantial repercussions for the country’s property market even if Evergrande survives in some form.
They said: “It seems clear that even in an orderly restructuring, the property sector in China is likely to face downside pressures.
“While authorities try to limit lower real estate prices due to fire sales by Evergrande by implementing price floors, price controls typically do not work.”
Meanwhile, the Financial Times reported that Credit Suisse had dumped all of its exposure to Evergrande following concerns over the company’s circular financing. The bank had previously been one of the business’s largest lenders, but stopped writing debt or arranging bonds in 2019.
European banks have been seeking to calm investors’ nerves.UBS, HSBC and Deutsche Bank have all emphasised their limited exposure in the last few days.
Meanwhile staff at Evergrande’s electric vehicles business have not been paid, in a sign contagion from the property company’s core operations are spreading to other parts of the business.
Asset manager Amunda slashed its 2021 growth forecast for China from 8.7pc to 8.3pc on Friday in response to the housing crisis.
It said: “This process is going to be choppy. In a capital-intensive sector such as real estate, a decline in debt levels will be reflected by a strong volume reduction.”
TS Lombard economists have also cut their growth forecast, saying Chinese authorities are “exhibiting a high pain threshold” and warning the risks are rising as an intervention is delayed.
They said it is now too late to avoid a significant slowdown in property investment, adding: “This is the start of a new property sector development model, featuring greater state involvement, lower investment and slower economic growth.”
