China’s local authorities take a hard look at Evergrande’s projects to ring fence any collapse from hurting their jurisdictions

A community in Guangzhou Huangpu district ceases Evergrande’s contract for local shantytown renovation project
At least nine provinces demand Evergrande affiliates to transfer project revenue to government-managed bank account to avoid the funds being used for other purposes or businesses

Evergrande crisis

Iris Ouyangin Shenzhen

Published: 9:30am, 4 Oct 2021

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Local authorities in mainland China are taking a hard look at the property projects undertaken by China Evergrande Group, as they ring fence their jurisdictions and communities from a possible collapse in the world’s most indebted developer with US$300 billion of liabilities.

At the Yunpu Street area in the Guangdong provincial capital of Guangzhou, where the property magnate Hui Ka-yan first founded Evergrande in 1996, the Canglian community banned the developer from taking part in the reconstruction of a local shanty town, according to a notice last week. The Canglian community was concerned about the cash-starved developer’s capacity to complete the work at the 113-hectare project, which is expected to last three years.

For Evergrande, the snub by Canglian could be the first domino piece to fall. The developer is involved in the reconstruction of 146 shanty town projects across mainland China, an order book estimated at 100 billion yuan (US$15.5 billion) by Kaiyuan Securities. Nine in 10 of them, 131 in all, are located in the Greater Bay Area (GBA) comprising Hong Kong, Macau and 11 cities in southern China. Shenzhen, the headquarters of Evergrande since 2017, had 62 of those projects, according to a separate assessment by TF Securities.

Urban reconstruction forms a crucial part of the public works and infrastructure projects under way in China as the world’s most populous nation tries to keep the economy humming to keep the labour force employed and sustain domestic consumption, while the global coronavirus pandemic has decimated economies around the world. China has 53,988 of these shanty town works projects in 2021, according to government data.

A notice by the Nansha housing authority in the Guangdong provincial capital of Guangzhou, about putting all sales proceeds from Evergrande's local sales office in escrow to ensure stability, dated September 22, 2021. Photo: Iris Ouyang.

Evergrande’s woes don’t end there. The district housing regulator of Nansha in Guangzhou has instructed the developer’s local sales office to put all sales proceeds in escrow under the local authority’s management to protect the interest of homebuyers and ensure the completion of the project, according to a September 22 notice seen by South China Morning Post. Officials at the housing authority declined to comment. Authorities at the Fusui county of Chongzuo city in Guangxi, and the Jiangjin district in Chongqing, did the same.

Other local authorities across the country are resorting to various measures to protect the interest of their communities, as they are anxious to ensure stability and a protest-free period during the ruling Communist Party’s centenary. The authorities of at least nine provinces and regions across China had put the management of Evergrande’s housing projects under some kind of state management, Caixin reported earlier, citing an unnamed person close to Evergrande’s management. Spokespeople at the developer did not respond to requests to comment.

Sources: Company data, Goldman Sachs Global Investment Research. SCMP Graphics

The moves by the local authorities underscore why Hui, also known as Xu Jiayin in his native Henan province, was forced to make a show of pledging to complete and deliver all of Evergrande’s projects. The magnate, who is also a delegate to the Chinese legislature’s advisory body, made his senior executives sign a pledge on September 1 to ensure every home and project undertaken by his group is handed over.

Still, local authorities are not taking their chances. The Nanhai district of the Guangdong provincial city of Foshan in the GBA has ordered those Evergrande projects that are still under construction to be taken off the list as approved collaterals for mortgages and other loans. In Hong Kong, where Evergrande’s inaugural housing project Emerald Bay in Tuen Mun has flopped, commercial banks like HSBC and ICBC (Asia) have stopped approving mortgage loans associated with the development since July because of concerns over its ability to finish the project.

At office and apartment building Evergrande Junrui in Huaqiang North area in Shenzhen where Evergrande is based, a police officer was sitting at the door of the sales office for the project that’s under construction.

The building is wrapping up its top, and the units will be delivered on time by the end of 2023 according to sales, as the local government is having close scrutiny on the project to guarantee people’s livelihood related functions accomplished. The project, whose units open for normal homebuyers were sold out earlier on big discounts - as high as 14 per cent cheaper than original price, has a post office and apartments for talents who meet certain criteria of the local government.

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