Ocean Flower Island, an artificial archipelago off the north coast of Danzhou in Hainan, was built by the Evergrande Group - whose grand ambitions may prove to be its downfall. Photo: AFP

Evergrande should speed up its restructuring because its debt crisis has the potential to affect many homebuyers, according to a commentary published by Youth.cn, a website run by the Communist Youth League of China.

Evergrande’s fate should be different from that of HNA Group, which was restructured after declaring bankruptcy in January, as HNA’s collapse did not directly affect Chinese people’s livelihoods, the Chinese Communist Party-affiliated author said.

Commentators and market analysts have suggested foreign investors who bought Evergrande’s US-dollar bonds face slim prospects of fully redeeming their investments, with many suggesting they should prepare to write off as much as 70-80% of their investments.

Evergrande has faced cash flow problems ever since its failure to get listed in the A-share market through a back-door listing in mid-2020. Its cash flows further deteriorated this year as the company’s property sales were slower than expected. 

China’s Ministry of Housing and Urban-Rural Development told domestic banks earlier this month that Evergrande would not be able to make loan interest payments due on September 20.

However, Hengda Real Estate, Evergrande’s property arm, announced an interest payment on one of its onshore corporate bonds via an OTC arrangement.

Many analysts believe that Beijing ordered banks to provide special treatment to Evergrande’s renminbi bonds but such measures were only aimed at buying the company time to restructure, not bail out, its failing businesses.

They said Beijing would not want any major market fluctuations ahead of October 1, which marks the 72nd National Day of the People’s Republic of China.

“The purpose of restructuring is to protect the public sector, restore Evergrande’s operations and avoid its bankruptcy while liquidation is for compensating the creditors,” a columnist named Su Man wrote in an article on Youth.cn. “Simply, restructuring means that emergency rescue is still feasible and liquidation means it isn’t.”

From the national perspective, Beijing prefers for Evergrande to restructure its businesses to maintain social and economic stability, wrote Su. From a commercial perspective, restructuring was also a better choice than liquidation for the company.

The Evergrande Center building in Shanghai. Photo: AFP / Hector Retamal

“To maintain social stability, it’s necessary for Evergrande to continue to run its businesses. It’s also feasible for the company to sustain its operations,” the author wrote.

Su suggested Evergrande should sell its unfinished property projects to other private developers, while the buyers of the property would have to ensure that apartments and houses are delivered as promised by Evergrande to homebuyers.

On September 1, Evergrande’s group chairman Hui Ka-yan and eight vice-presidents and key executives held a signing ceremony guaranteeing that all of the company’s homebuyers would receive their apartments.

“Evergrande has avoided a default on its onshore bonds after Beijing ordered domestic banks to handle its interest repayments with special treatment,” said Victor Ng, an adjunct associate professor of economics and finance at the Hang Seng University of Hong Kong.

“Even if its onshore bonds mature now, Beijing can allow Evergrande to pay in instalments in the coming decade.”

Under these terms, Evergrande’s bankruptcy could be delayed indefinitely but China’s property sector and economy could remain stagnant for at least a decade, Ng predicted.

Meanwhile, foreign institutional investors who bought Evergrande’s US dollar bonds would probably have to prepare for a haircut of up to 80% of their investments, as it was not likely that Evergrande would fully repay them, Ng said.

It was the same market logic used by the US Federal Reserve when it bailed out insurer AIG, which had about 80% of its investment exposure to ordinary US people, but not investment bank Lehman Brothers in 2008, which catered to rich investors, he said.

Tai Hui, chief Asia market strategist at JP Morgan Asset Management, said the debt problems of Chinese property developers would not cause another 2008 global financial crisis, as China had experience in handling similar cases.

Hui said the chance of having systemic risks in China’s banking sector was low as the People’s Bank of China had recently increased market liquidity through reverse repo operations, or the purchase of securities with the agreement to sell them at a higher price at a specific future date.

The unfinished Guangzhou Evergrande football stadium in China’s southern Guangdong province. Photo: AFP

He added that although systemic risks in the banking system would be avoided, at least eight or nine major property developers would face cash flow problems in the short term. He said the central government’s policy direction was to protect homebuyers but not bond and stock investors.

On Monday, Evergrande’s shares rose 8.05% to close at HK$2.55 (32.8 US cents). The company’s shares have fallen by 85% so far this year. Last week, Evergrande’s offshore bonds fell toward 25 US cents on the dollar, meaning that the value of these bonds has dropped by 75%.

Last Friday (September 24), Evergrande failed to pay interest of US$83.5 million to global investors who held its bonds. Until now, they have not been informed by the Shenzhen-based property developer about the interest payments.

The company has a 30-day grace period to make payment before any default is officially reported.

Read: Evergrande death knell delayed for social stability