Indebted Chinese property developer Evergrande Group’s shares rebounded strongly on Thursday (September 23) after group chairman Hui Ka-yan reportedly met 4,000 staff in a town hall meeting and called for accelerated property construction.
The company’s shares surged 32% to HK$3 on Thursday morning but retreated in later trading hours to HK$2.67, up 17.6% from the closing price on Wednesday.
Evergrande’s shares have lost some 80% so far this year on investor fears of a default, including on a US dollar-denominated note due today. The company owes some US$310 billion in outstanding debts to bondholders, banks, construction contractors and other creditors.
Today’s market bounce was driven by new market perceptions that it would avoid a disorderly debt resolution after an Evergrande unit was able to renegotiate interest payments on yuan bonds.
Commentators and analysts said some Chinese banks may also have allowed Evergrande to delay its loan repayments or even offered to write off some of its debt to avoid an immediate default.
But such measures will likely only buy the company time to sell its assets and push forward debt restructuring. They said Beijing would only extend a lifeline if Hui gave up his fortune to repay the company’s debts.
Evergrande has faced cash flow problems since its plan to get listed in the A-share market through a back-door listing was scrapped last year. Last September, it sent a letter to the Guangdong government seeking help with its debt problems, saying that a failure to resolve the problems could cause systemic risks to the banking system.
Strategic investors later agreed to give up the redemption of the loans they offered to Evergrande in exchange for ordinary shares.
However, Evergrande’s cash flow problems deteriorated this year as property sales were slower than expected. As the property developer could not pay its contractors and workers on time, construction at many property sites was suspended, making it more difficult to replenish its liquidity.
In early September, Evergrande’s wealth product investors protested in Shenzhen due to non-payment upon maturity.
Evergrande is also unable to raise new funds through bond issuance as its existing paper has been classified as “default imminent with little prospect for recovery” by credit rating agencies. On September 15, Hui went to Beijing and may have asked senior officials for a bailout, though there are no signs yet the government will intervene in the crisis despite concerns of possible contagion effects on the wider property sector and banking system.
Hui sent a letter to his company’s employees during the Mid-Autumn Festival on Tuesday that said Evergrande would definitely overcome the challenges and emerge from its darkest time. He urged all staff to help resume and accelerate the construction of property projects so that the company could honor its obligations to homebuyers, investors, business partners and financial regulators.
At 11 pm on Wednesday, Hui met 4,000 employers in a town hall meeting, urging them to speed up property construction, mainland media said.
Cao Heping, an economist at Peking University, told Hong Kong media on Tuesday that the central government had no responsibility to bail out giant companies.
“Over the past many years, Evergrande has not built any public infrastructure that can support China’s economy. The central government should protect the country, not businessmen who have tens of billions yuan at home and private jets…their single meal can feed people in half a village. They bought football and basketball teams but did not create any brands. What were they doing? Definitely no bailout,” said Cao.
Cao also said Evergrande was not yet bankrupt as it still had a large amount of property and land assets it could sell. He said Hui and senior management had to give up the bonuses that they earned from Evergrande.
He also said it was unacceptable that Evergrande raised 50 billion yuan by issuing a two-year real estate trust and then board directors were immediately granted bonuses worth 40 billion yuan.
In early August, mainland media said Chinese financial regulators had already finished an evaluation of Evergrande’s financial situation and concluded that the property developer had enough assets to repay its debts. The central government asked Guangdong officials to resolve Evergrande’s debt matter through a “market-oriented” approach, financial intelligence provider REDD reported on August 21.
Jason Poon, a Hong Kong-based commentator, said it was possible that Beijing had given Hui more time to sell Evergrande’s assets as some Chinese banks could have allowed the company to delay debt payments or even offered to write down some of the debt. Poon said Evergrande may avoid an immediate bankruptcy in the short term but it still needs to undergo deep debt restructuring.
Poon said Hui may have intentionally created an atmosphere that his company would go bankrupt very soon to force Beijing to pump in money. He said some Hong Kong tycoons had not offered help as they were waiting for the best time to buy Evergrande’s cheap shares.
He said Beijing had refused to bail out Evergrande but ordered Hui to compensate homebuyers and wealth product investors to avoid social instability. He said if Evergrande’s problems led to social unrest, Hui would likely go to jail.
Taiwanese commentator Hsieh Chin-ho said it was unlikely that Evergrande’s crisis would become another Lehman Brothers, which went bankrupt in 2008 and led to a global financial crisis.
Hsieh said the case was also different from China Huarong Asset Management, which had been acquired by state funds immediately after its bankruptcy.
HK01.com, a Hong Kong-based media outlet, reported on September 14 that Hui had secretly transferred the ownership of a luxury house worth HK$800 million (US$103 million) to his private assistant in July.
Six senior managers at Evergrande’s wealth management division have also received their own money through early redemption over the past few months, according to reports. Last Sunday, Evergrande said these executives had to return the money to the company and face punishment.
Xu Jijun, a research fellow from the Zhejiang Academy of Social Sciences, said in an article last week that some mainland capitalists had never thought about helping Chinese people become prosperous but only tried to transfer their companies’ money into their own pockets and let their offspring become wealthy.
Xu criticized Evergrande for pushing up property prices in the mainland and taking away the profits while leaving debts for local governments, banks and average citizens. He said Chinese people had set a goal of “common prosperity” while capitalists should spend what they earned from the public on the people.
On August 17, Chinese President Xi Jinping said at a top Communist Party financial and economic affairs committee meeting that China should aim to promote “common prosperity.” Beijing has tightened rules in different industries this year and called to give people incentives to donate to charity.
Internet giants including Alibaba and Tencent have announced charity schemes to echo Xi’s “common prosperity” drive.