The logo of Evergrande Group is seen on the façade of the company headquarters on February 9, 2021 in Shenzhen, Guangdong Province of China. Photo: Getty
by SCMP Editorial
by SCMP Editorial

Evergrande pain the price to pay in new growth approach

  • The world’s most indebted property firm has crossed Beijing’s so-called three red lines and, although an uncontrolled collapse must be avoided, China is right to pursue other avenues of development
For world markets, the question over Evergrande’s debt crisis is always about whether it is manageable. For now, the answer is clearly yes. After some jitters among global investors, capital markets recovered as senior analysts and financiers converged on a consensus that there would be no contagion; this is not to be China’s Lehman moment.

But what the corporate crisis means for the beleaguered property sector and the overall economy in China is more difficult to ponder. Evergrande is the first major casualty of Beijing’s so-called three red lines to reduce unsustainable debt levels in the property sector.

Bailing out the world’s most indebted property firm – with more than US$300 billion in liabilities – would send the wrong message and undermine the discipline Beijing hopes to install in the sector through the red lines.

Of those three metrics – a 70 per cent ceiling on liabilities to assets, a 100 per cent cap on net debt to equity, and a cash to short-term borrowing ratio of at least one – Evergrande at one stage breached all of them. The thresholds mean highly indebted developers such as Evergrande would find it hard to refinance, hence its latest debt payment crisis.

But while a state bailout is out of the question, an uncontrolled collapse must also be avoided. To preserve social stability and “common prosperity”, the interests of tens of thousands of investors who bought the firm’s high-yield wealth management products and as yet uncompleted flats must be taken care of, as do its legions of creditors. China’s biggest corporate restructuring is in the offing. Foreign holders of its bonds and notes, which have dropped to about 30 US cents on the dollar, will likely take a significant haircut.

Evergrande’s staunchest ally for 12 years cuts losses, heads for exit

China’s authorities have had experience in untangling the debts and finances of large conglomerates such as Anbang, HNA, Tomorrow Group, Dalian Wanda and the CEFT Group. HNA, with a vast global portfolio from the largest stake in Deutsche Bank to a quarter of Hilton Hotels, was broken up this week, the result of almost four years under state control.

Managing the Evergrande fallout won’t be without pain, as such credit events are usually not isolated. China, after all, has eight of the world’s 10 most-indebted property developers; and the real estate sector accounts for about 29 per cent of national economic output.

Indeed, it was in response to the unsustainable debt levels and lopsided economic dominance of the sector that Beijing has decided to draw a line in the sand. The nation is sensibly turning away from the sector to pursue other avenues such as hi-tech manufacturing and green technologies as new engines of growth.

This transition will not be painless or without risk. The Evergrande debacle shows why the stakes are so high.