Tag Archives: debt crisis

And The Greatest Of These Is Stability

THE PECKING ORDER of the priorities laid out by the Financial Stability and Development Committee (FSDC), China’s top financial policy committee, on March 16 is probably stability, economic stimulus and greater clarity on the regulation of the platform internet companies.

The readout from the meeting, chaired by Vice Premier Liu, also represents a short-term order of business in response to some unexpectedly gusty economic headwinds rather than a long-term change of policy course — an effort to stabilise financial markets and bolster investor confidence.

There is nothing in the reports of the FSDC’s deliberations to suggest private companies will not have to align themselves with government policy objectives or that current policy objectives have changed materially.

On the contrary, financial institutions were told to ‘consider the big picture’ and firmly support the development of the real economy, while regulators were told to complete the ‘rectification’ of the platform internet companies soon and with transparency, not to ease off them.

Nonetheless, investors in Chinese financial markets chose to see only light at the end of the tunnel, not the darkness surrounding them of late. The CSI 300 Index of mainland shares climbed 4.3%, while the Hang Seng China Enterprises Index jumped 13% in Hong Kong, recouping nearly half of its loss this year.

The China Banking and Insurance Regulatory Commission encouraged bank subsidiaries, asset managers and insurance companies to increase their investment in equities. The People’s Bank of China said the risks in the real estate market must be dealt with ‘under the principle of steady progress’. The finance ministry let it be known that there would be no further expansion of the property tax trial this year, regardless that President Xi Jinping in a speech last October indicated that a national property tax would be a centrepiece of ‘common prosperity’ .

Going even slower on deleveraging the real estate sector and introducing a property tax is a sign of how worried authorities remain about the housing market’s slump, the intractability of developers’ debt and their potential knock-on effects for the broader economy.

Despite regulators relaxing M&A funding rules and being more permissive towards developers taking on new debt, reversing the squeeze on financing for property developers, potential buyers have remained cautious. It has only really been state-owned banks buying up their clients’ distressed deals.

Reuters news agency has reported that in Shanghai, authorities told local state-owned enterprises (SOEs) to buy new bonds being sold by Greenland, a developer at risk of defaulting on a $500 million offshore bond in December. Reuters says this is the first known example of SOEs being ordered to participate this way in a bailout.

The war in Ukraine poses further challenges to an economy also dealing with an uncertain global economy, the effects of the most menacing surge in new Covid cases since the pandemic’s earliest days at the start of 2020, and the unexpected outflow of capital when other emerging markets are attracting it.

At the Two Meetings earlier this month, authorities made it clear that some long-term economic reforms would be put off for now in order to focus on growth this year. Even before then, at the Central Economic Work Conference at the end of last year, stability was the watchword.

Stability will matter more than ever in the Party Congress in the autumn. Investors should remember that their sentiment is also expected to fall in with that cause.

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Rate Cuts Highlight Tricky Growth Balance China Has To Strike

Chart showing China's quarterly GDP growth year-on-year from Q1 2019 to Q4 2021

CHINA HAS CUT interest rates for the first time in two years as the property sector debt crisis and a resurgence of Covid-19 weigh on the economy.

Fourth-quarter GDP growth came in at 4.0% year-on-year, its slowest pace of growth in 18 months. Quarter-on-quarter growth was 1.6%, up from the third quarter’s 0.7% but still far from robust.

While both the y-o-y and q-o-q numbers slightly exceeded consensus expectations, they confirm the return to the trend slowdown in growth seen before the distortions of the pandemic.

Year-on-year growth slowed in each quarter last year, although the economy expanded by 8.1% for the full year as it bounced back from 2020’s initial outbreak of Covid-19. The official target for 2021 was ‘over 6%’.

Retail sales rose by only 1.7% in December, much less than forecast, as new Covid-19 outbreaks forced new lockdowns in several cities. Investment also slowed, although industrial output rose.

The interest rate cuts by the People’s Bank of China signals a more assertive monetary approach than the easing already seen in the third quarter with the lowering of banks’ reserve requirement ratios.

Today’s cut in the benchmark one-year loan prime rate by ten basis points to 2.85% and the rate on seven-day reverse repurchase agreements to 2.1% follows December’s five-basis-points cut in the one-year policy loans rate. The five-year loan prime rate, the benchmark rate for mortgages, was left unchanged, but a reduction in that sooner rather than later would not be a surprise.

The reverse repo rate cut is the more unexpected of the latest cuts. It reflects authorities intention to stabilise the economy well ahead of the Party congress later this year when President Xi Jinping will likely be anointed to a third term.

A managed slowing of growth to rebalance the economy is politically tolerable, providing it comes with no social disruption. However, a property sector collapse with widespread developer defaults and the financial and social risk that would bring would not be.

The debt overhang remains serious. Corporate debt was still 156.8% of GDP in the second quarter of 2021. That is down from 163.4% a year earlier but still high enough to complicate the way forward for policymakers aiming to stimulate growth while reducing the economy’s reliance on debt-fuelled infrastructure investment and export-oriented manufacturing.

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Evergrande Worries The US Fed After All

THE US FEDERAL RESERVE’S latest semi-annual financial stability report comes with an uncommon warning about China’s financial stresses, not the sort of thing it typically comments on.

Its concern is that the stresses in China’s real estate sector could strain the Chinese financial system, with possible spillovers to the United States:

In China, business and local government debt remain large; the financial sector’s leverage is high, especially at small and medium-sized banks; and real estate valuations are stretched. In this environment, the ongoing regulatory focus on leveraged institutions has the potential to stress some highly indebted corporations, especially in the real estate sector, as exemplified by the recent concerns around China Evergrande Group. Stresses could, in turn, propagate to the Chinese financial system through spillovers to financial firms, a sudden correction of real estate prices, or a reduction in investor risk appetite. Given the size of China’s economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States.

Was it just two months ago that Fed Chair Jerome Powell said that the risks from Evergrande’s troubles seemed very particular to China?

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Evergrande, Still Breathing Hard, Resumes Construction

BELEAGUERED PROPERTY DEVELOPER Evergrande dodged its October 23 debt default deadline, making an $83.5 million payment to its international bondholders due on September 23, just before the 30-day grace period expired.

That was the first of five coupon payments it has missed on their due dates, totalling a combined $275 million.

It is unclear where Evergrande got the $83.5 million from, but it has bought another week of breathing room, although the company will still be breathing hard under the weight of its more than $300 billion in liabilities.

One place the funds for the coupon payment did not come from was the hoped-for sale of control of its core property business, Evergrande Property Services. Talks to sell a 51% stake of Evergrande Property Services to Hong Kong-listed Chinese property developer Hopson Development fell through.

Trading of shares in Evergrande Property Services resumed on Thursday on the Hong Kong stock exchange, having been suspended since October 4 pending a possible general offer for its shares. Evergrande said the day before that there had been no material progress in asset sales. The last significant disposal was a 20% stake in Shengjing Bank to an agency of Shenyang city’s government.

However, the company has restarted work on up to 10 projects in six cities, including Shenzhen. On August 31, it had acknowledged that delays in paying suppliers and contractors had forced the suspension of some projects. However, its statement on Sunday on WeChat announcing the resumptions did not disclose on how many of its 1,300 developments across China it had halted work.

Last week, People’s Bank of China Deputy Governor Pan Gongsheng reiterated that the risks from Evergrande are controllable, property sector financing is returning to normal, and that the bank will protect households and suppliers.

Not many investors in financial markets share the central bank’s sanguinity. First, there is the ever-present risk of default. Each grace period is starting to feel like a round of Squid Game for Evergrande.

Second, the speed and depth of the slowdown of China’s property market that the crisis has triggered are raising concerns about the extent to which they will weigh on GDP and whether authorities can balance reducing the cost of living by making housing more affordable with managing decelerating growth.

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Contagion Fears Will Intensify As China’s Property Debt Woes Widen

A THIRD WEEK; a third round of missed bond payments by beleaguered property group Evergrande.

Reports say the group missed coupon payments totalling $148 million due today. That follows two sets of payments missed in September. The clock is ticking down on the 30-day grace period on the first of them before a default must be declared.

The developer has more than $300 billion in liabilities.

The fear is of the debt crisis spreading to other developers. A total of $92.3 billion of bonds issued by Chinese developers fall due over the next twelve months. Developers with weak credit ratings are already finding refinancing their debt next to impossible.

Fantasia Holdings, a mid-sized developer based in Shenzhen, has already defaulted on $206 million in payments due. Sinic Holdings, which develops residential and commercial property across China, told the Hong Kong Stock Exchange on October 11 that it would likely default on a bond payment due on the 18th of this month. Beijing-based Modern Land is asking its bondholders to extend payment-due deadlines by three months.

If the sector’s liquidity problems do not improve, further defaults seem inevitable. The question would then become how much contagion there would be in the rest of the economy, of which real estate accounts for a quarter.

Managing a soft landing for the sector’s most troubled companies without making an overt bailout remains a high priority for authorities. More measures at the municipal and provincial level to support developers, such as Harbin’s release of presale funds held in government escrow accounts to ease cash flows, are likely.

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China’s Property Sector Teeters

THE DOMINOES in China’s property market are teetering, even if the first has yet to fall.

Fantasia Holdings, a mid-sized developer based in Shenzhen that the rating agency S&P downgraded to triple C last week, suspended trading in its shares on the Hong Kong exchange on Tuesday after announcing that it had defaulted on a $206 million bond the day before.

It has a further $1.9 billion of offshore bond payments a d $992 million of onshore bond payments due by year’s end. Last month, the company had told investors that it did not have a liquidity issue.

Stress is clearing rising in China’s property sector and the high-yield bonds that underpin it. Fantasia joins beleaguered Evergrande in suspending its shares. In addition, rating agency Fitch has cut its grading of another developer, Shanghai-based Sinic Holdings, to C from triple C. There is only one further cut left, to D for default.

Evergrande, which is selling assets where it can to prevent being dragged under by total liabilities of more than $300 billion, is expected to announce that it has sold 51% of its property service business, which is listed in Hong Kong, to Hopson Development for $5 billion. Evergrande missed an interest payment on an offshore bond on September 23, triggering a 30-day grace period before a formal default.

Evergrande has said nothing formally beyond an exchange filing that it was suspending trading in advance of a ‘possible general offer’ for its Hong Kong-listed shares. Any such offer could be imminent or could not come for some time, with Evergrande’s shares, which had fallen 80% this year, remaining suspended in the interim.

Beijing has also been officially silent on the sector’s problems, even if authorities are orchestrating as soft a landing as they can behind the scenes. Spoiler alert: it will still be pretty bumpy, especially for bondholders.

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Evergrande Sells More Assets As Backdoor Bailout Continues

EVERGRANDE’S SALE OF a 20% stake in Shengjing Bank to an agency of Shenyang city’s government provides a snapshot of how the beleaguered property group is being bailed out.

Shenyang Shengjing Finance Investment Group will pay 10 billion yuan ($1.55 billion) for the stake, but the proceeds will be used to offset Evergrande’s liabilities to the bank. Evergrande retains a 14.6% stake in the bank.

Cash-strapped Evergrande has already shed various assets, including 25 billion yuan worth of property and an earlier 2% stake in Shengjing Bank that raised 1 billion yuan.

More such asset sales are likely, as authorities actively nudge the restructuring of the group’s debt. They have moved to limit contagion from Evergrande spreading after the company missed several interest payments this month to lenders, contractors and suppliers, as well as an $83.5 million coupon payment due on a dollar-denominated offshore bond and concocted a palliative deal with its onshore bondholders.

More deadlines are approaching on its local and offshore bond obligations, including a $45 million bond payment due today, on which Evergrande is likely to invoke its 30-day grace period to make payment. The rating agency Fitch cuts its rating for Evergrande to a ‘C’ today, which signifies a company in ‘near default’. It is Fitch’s fourth downgrade of the group since June 22.

Evergrande has outstanding international debts of about $20 billion and total debt of around $300 billion. More than 100 Chinese banks have lent money to Evergrande, and 1.4 million new housing units have been sold but not completed.

The restructuring will prioritise homebuyers, then contractors and suppliers owed money, followed by domestic investors in Evergrande’s financial products. Foreign investors will be at the back of the queue.

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Evergrande’s Two Aspirin Help For Now

FOR A COMPANY whose $300 billion of debt sent shivers through investors around the world, sketchy news that it has resolved a $36 million interest payment that was due on Monday seems more a palliative than the curative medicine investors are taking it to be.

Even though it is the equivalent of a doctor telling a patient to take two aspirins for a broken leg and see how they feel in the morning, the announcement by Hengda Real Estate, the main property unit of the world’s most indebted if no long largest real estate developer, Evergrande, that it reached an unspecified agreement with holders of one of its onshore bonds appears to have eased the pain in the financial markets.

International investors have now returned to worrying about something they at least think they understand how to worry about, inflation and stimulus unwinding. Evergrande’s financial accounting is more opaque than even central bank monetary policy.

However, the announcement said nothing about the little matter of an offshore bond on which an $84 million coupon payment falls due on Thursday, although it has a 30-day grace period.

On Monday, Evergrande reportedly missed interest payments to at least two of its biggest lenders. Authorities remain concerned about the systemic financial risk that Evergrande’s sprawling debt obligations pose if there is a disorderly collapse of the group.

They also worry about the potential spillover into the real economy, which risks social instability and thus is a political matter. The group owes $147 billion to unsecured trade creditors such as suppliers, while some 1.5 million disgruntled buyers of Evergrande homes off plan who now face losing their deposits will, at the very least, vent to let off steam, even if more serious protest will be contained.

One reason that the amount owed to trade creditors is so eye-popping is that Evergrande systematically deferred payments to its suppliers so it could cut its interest-bearing liabilities, which it succeeded in doing, reducing them by some 145 billion yuan ($22.4 billion) to 571.7 billion yuan as of end-2020..

For now, the ‘d’ word has been avoided — and authorities have the administrative tools to ensure it stays that way. That will dull the pain and provide temporary relief, if not a cure.

Update: Regulators have reportedly instructed Evergrande to focus on completing unfinished properties or repaying deposits while avoiding a near-term default on its dollar-denominated bonds. Beijing is also said to have told local officials and state-owned enterprises to step in with bail-outs only as a last resort in the even of a disorderly collapse of the property developer.

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Risks Abound In Reversing China’s First-Quarter GDP Contraction

IT IS NO surprise to learn that China’s economy contracted in the first quarter as a result of the coronavirus outbreak. The officially announced GDP figure for January to March of a 6.8% year-on-year contraction is slightly worse than the consensus forecasts of 6.5%. but by no means as bad as some of the darkest forecasts.

It is the first contraction since the National Bureau of Statistics adopted quarterly reporting in 1992, and it negates the 6% expansion reported in the previous set of GDP figures at the end of last year. But so exceptional have been recent circumstances that there is little store to be put in such comparisons.

Retail sales and fixed asset investment both fell 16% in the first quarter as the lockdown took hold. Industrial production and exports all but came to a halt.

The questions for authorities now are what pace of recovery can be generated, what measures are needed to bring that about, and what are the risks in getting it wrong.

There are signs that the country is getting back to work. Factory output in March was down just 1.1% as manufacturing restarted, but, as that figure suggests, it is still well below full capacity. Goods exports fell by 6.6% year-on-year in March in dollar terms, having lost 17.2% year-on-year in January and February together. With the rest of the world still confronting the pandemic, global demand will be weak for some time, offering dull prospects for Chinese exports, although there is also opportunity to grab market share while rivals are incapacitated.

There is political risk in that for Beijing if Chinese companies are seen to be dumping their excess production capacity abroad at rock-bottom prices and taking advantage of still ailing economies elsewhere. The Trump administration in the United States is already on high alert for that, especially in the strategic sectors identified in Made in China 2025. More broadly a resumption of the US-China trade war remains a persistent and unpredictable risk.

Authorities have already put in place fiscal stimulus and kept monetary conditions loose to ensure ample liquidity in the economy so banks can help private businesses stay afloat. The unemployment rate of 5.9% in March, although slightly better than February’s all-time high of 6.2%, shows the need for that.

The risk to social stability in the face of joblessness is a perennial concern for the leadership. The China Labour Bulletin, a non-governmental organisation, has reported protests over wage arrears in various parts of the country this month. Earlier this month, Wuhan market stallholders staged a protest to demand rent relief for the time the lockdown left them unable to operate. Similar demonstrations took place in Hunan province at the end of March.

More are likely. Targetted relief to defuse such pent-up discontent is expected.

Large-scale infrastructure investment is not. Government and corporate debt have increased alarmingly as the pandemic has put on hold the deleveraging campaign that authorities have conducted since 2016. Now many more companies are struggling to refinance their debt. Corporate bond defaults seem sure to increase, especially in retail and leisure, travel and tourism.

Beijing may well have to reinstate the implicit state guarantee temporarily for non-systemically-important firms as it cannot risk a mass of defaults by smaller firms threatening the financial system. China has the capacity, economically and politically, to contain systemic risk, and its semi-isolation from the international financial system limits the spillover possibility.

However, the People’s Bank of China has already said that it will tolerate a small rise in bad loans. ‘Small’ might turn out to be much larger than initially intended.

If there is a silver lining to all this, it is that it may make it easier to achieve the government’s goal of slowing the economy to a sustainable long-term growth rate. The National Bureau of Statistics’ spokesman announcing the first-quarter contraction also said that average annual growth over the next two years was forecast to be about 5%.

That is in line with the Asian Development Bank’s forecast of 2.3% GDP growth for this year as a whole and 7.3% growth in 2021 and probably close to where planners would have liked the economy to be by the end of next year. The trick will be to get there smoothly. 

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A Missed Tock Of China’s Ticking Debt Bomb

This Bystander is hardly cheered, if not surprised, to read this report via Bloomberg:

China’s local government debt may be almost 3 trillion yuan ($473 billion) higher than the figure given by the nation’s audit office, if loans taken out by township governments are included, the Economic Observer reported, citing research from an independent institute.

Borrowing by townships, an administrative tier of government below provinces, cities and counties, wasn’t included in a report by the National Audit Office in June that put debt from those three levels at 10.7 trillion yuan, the weekly newspaper said in a report on its website dated Nov. 12, citing Beijing Fost Economic Consulting Company.

At a total of 13.7 trillion yuan, or $2.2 trillion for those of you keeping score at home, that is only chump change at that level off Italy’s outstanding sovereign debt ($2.6 trillion). We’ve seen how these ticking debt bombs can upset markets and oust political leaders. China is fortunate not to have a democratically elected government that investors could force to resign, as they did in Italy and Greece.

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