The Evergrande Center building in Shanghai is becoming emblematic of China's wider economic risks. Photo: AFP / Hector Retamal

HONG KONG – Evergrande Group’s shares rebounded on Tuesday after being suspended for a day and a half as investors braced for more bad news about the property developer’s debt restructuring but it turned out that the halt centered on a project issue in Hainan. 

In a filing to the Hong Kong stock exchange, the heavily-indebted Evergrande said it was ordered by the Danzhou Comprehensive Administrative Law Enforcement Bureau to demolish 39 residential buildings on Ocean Flower Island in Hainan province within 10 days.

It said the bureau’s decision was related only to the buildings on the land plot 2-14-1 located on No. 2 Island and did not involve other plots of land of the Ocean Flower Island project. The company said it would hold talks with the authority in a bid to resolve the issue.

Ocean Flower Island is an artificial island where the Shenzhen-based Evergrande has built residential buildings in three phases, according to mainland media. The property developer reportedly started construction on the island before it gained official approval but failed to complete the project due to liquidity problems, those reports said.

The 39 buildings that will be demolished are worth a total of 7.7 billion yuan at current market prices. Several of Evergrande’s sites in Hainan were confiscated by the local government in late 2021 because they had been idle for more than two years.

Evergrande’s shares jumped as much as 5.7% within the first 30 minutes of trading, which was resumed on Tuesday afternoon, and closed up 1.26% at HK$1.61 (20.65 US cents). 

On Monday, trading in Evergrande’s shares was halted pending an announcement containing inside information. As many investors anticipated Evergrande would announce new debt restructuring woes, shares of other Chinese developers slumped. 

Sunac China Holdings fell 9.5% to close at HK$10.64, while Shimao Group dropped 6.8% to HK$4.75 on Monday. However, they rebounded after trading in Evergrande shares resumed on Tuesday.

On Tuesday, Evergrande reported a 39% decline in contracted sales to 443.02 billion yuan (US$69.66 billion) in 2021, from 723.25 billion yuan a year earlier, while its contracted sales fell 33% to 54.27 million square meters for the same period.

The company has not disclosed its monthly property sales performance for several months since the media reported its liquidity problems.

Much of Ocean Flower Island, an artificial archipelago off the north coast of Danzhou in Hainan, was built by the Evergrande Group. Photo: AFP

Meanwhile, Chinese media reported that several other Chinese developers had significantly cut prices for their apartments, which are mainly in lower-tier cities, to improve their liquidity and prepare for debt payments due this year.

Since last September, Evergrande has been in the media spotlight as investors in the company’s wealth management products complained they could not get back their money after the products matured. People who bought Evergrande apartments also said they did not receive their properties on time.

Evergrande had been unable to get new bank loans after China’s financial regulators in July 2020 launched what they called “three red lines” that forbid highly-geared property developers from receiving loans for expansion.

In early October, the Centaline Property Agency filed a lawsuit against Evergrande, which failed to pay an agency fee of HK$106 million ($13.6 million) after the sale of its Hong Kong properties. On December 6, Evergrande failed to pay a bondholder due to cash flow problems.

Last November, S&P Global Ratings said in a research report that Evergrande’s debt crisis had not yet ended and the bigger test would be when $3.5 billion worth of US dollar-denominated notes comes due in March and April 2022.

The company previously announced its contracted sales amounted to 438.65 billion yuan for the first eight months in 2021, compared with 450.62 billion yuan for the same period in 2020.

On Tuesday, it said its contracted sales for the full year of 2021 totaled 443.02 billion, meaning its contracted sales slumped 98% to only 4.37 billion yuan between September and December from the same period in 2020.

Meanwhile, other Chinese property developers also dumped their apartments in lower-tier cities despite losses as they wanted to generate revenue to repay debt.

Among them, Hong Kong-listed Country Garden reportedly sold its apartments at an average price of 5,500 yuan per square meter, about 45% of its cost price of 12,000 yuan per square meter, in a residential project in a northern city in November.

Shenzhen-listed Jinke Property Group also cut selling prices for its apartments by more than 50%.

During the fourth quarter last year, Evergrande and Kaisa recorded more than 90% declines in contracted sales due to a collapse in homebuyer confidence in the two property developers, said Lung Siufung, an analyst at CCB International Securities.

Last month, contracted sales of Aoyuan, Shimao and R&F fell by about 30% from a year ago, while Agile, SCE, Times, Ronshine, and Zhenro recorded 38-57% declines in December sales despite their less precarious financial positions, Lung said.

An Evergrande property project in a file photo. Photo: AFP

“The collapse in homebuyer confidence is having a devastating effect on the Chinese developer,” he said. “Sales once served as the funding channel of last resort. But that source has dried up, jeopardizing the debt restructuring process taking place at the developers … In response, we expect the government to roll out supportive measures designed to boost sentiment.”

On December 6, the People’s Bank of China, the central bank, announced it would cut the reserve requirement ratios (RRR) for financial institutions by 50 basis points on December 15, releasing long-term funds of 1.2 trillion yuan to boost the economy.

Some analysts expected the RRR would allow banks to offer more mortgage loans to help revive property markets.

“There is no U-turn in sight for the strict policies on real estate, but some marginal relaxations may slowly emerge to contain credit risks, such as granting extra quotas for mortgages, relaxing rules for bond issuance for the property sector, and more recently, encouraging the financial support for acquisitions and consolidations among real estate developers,” Alicia Garcia Herrero, chief economist Asia Pacific at Natixis, said in a research report on December 24.

“Even though the Chinese government may not want to treat real estate as a major driver, the macro-prudential easing will need to continue if smoothening economic growth is the goal,” she added.

Follow Jeff Pao on Twitter at @jeffpao3

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