Chinese regulators meet with developer Evergrande amid growing attention to real estate

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A banner advertising the Emerald Bay residential project near the China Evergrande Center in Wan Chai District in Hong Kong, China, on Friday, July 23, 2021.

Lam Yik | Bloomberg | Getty Images

BEIJING – Chinese authorities called on debt-gated real estate giant Evergrande to settle its debt risks during a rare meeting with executives on Thursday.

Shares Listed on the Hong Kong Stock Exchange Chinese group Evergrande fell more than 60% this year to near four-year lows because investors were worried about the developer’s ability to repay the debt. Shares closed 1.6% lower on Friday, losing their initial gains.

The People’s Bank of China said Thursday in online application that he, along with the China Banking and Insurance Regulatory Commission, told Evergrande management that they needed to implement the central government’s strategy for the stable and healthy development of the real estate market.

The statement added that Evergrande needs to “actively address” debt risks, maintain financial stability and disclose truthful information in accordance with regulations, according to CNBC’s translation of the Chinese text.

The comments came days after Chinese President Xi Jinping said at a high-level meeting on economic policy that the country needed prevent large financial risks.

Evergrande Confirmed Meeting With Regulators In An Online Statement On Friday and said he would comply with those specific requests.

Evergrande, one of China’s largest private real estate conglomerates, sits at the intersection of Beijing’s core concerns: speculation in the property market, high debt levels and the resilience of an industry that accounts for more than a quarter of GDP.

Earlier this month, S&P Global Ratings reported that Evergrande has over 240 billion yuan ($ 37 billion) in invoices and trade payables – such as materials – to settle with contractors over the next 12 months. According to S&P, about 100 billion yuan, or just over 40%, should be paid by the end of December.

The ratings agency downgraded Evergrande and its subsidiaries from ‘B-‘ to ‘CCC’ on August 5 on expectations that “the conglomerate’s risk of non-payment will increase due to increased asset freezes by various commercial parties, indicating limited liquidity.”

“The negative outlook reflects growing liquidity tensions and the risk of non-payment of Evergrande. It also reflects our view that its plan to sell assets, while potentially significant, is not transparent or definite, ”S&P said in a note.

On Friday, the analyst was unable to comment on a meeting with regulators.

Chinese authorities are trying to curb speculative activity in the real estate market, which, together with related industries such as construction, accounts for more than a quarter of China’s GDP, according to Moody’s estimates released in a report at the end of July.

Beijing is particularly concerned about the rise in debt used for real estate development. Last year, three “red lines” arose because of the limitation on the amount of debt that real estate companies can hold in relation to their assets.

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The latest developments around Evergrande reflect the authorities’ commitment to limit risks in the real estate market with increased regulation before the end of this year, said Bruce Pang, head of macroeconomic and strategic research at China Renaissance.

“A supportive regulatory environment and fine-tuning of disincentives are critical to deciding whether Evergrande can emerge from the crisis smoothly,” said Pang. “Investors will be watching potential deals closely for signs of how much leniency Evergrande has received from Beijing. [regarding] liquidity problems in the real estate sector amid a campaign to strike a balance between limiting financial risks and ensuring social stability. “

The Chinese regulator’s meeting with Evergrande came as Beijing sped up regulation of various fast-growing industries last year, primarily related to technology.

In early November, the central bank, banking and insurance regulator and other departments met with Alibaba founder Jack Ma and executives at financial technology giant Ant Group. A few days later, Ant had to suspend the massive IPO and begin a series of meetings with regulators that forced the company to restructure as a financial holding.

Earlier in the past few years, Chinese authorities intervened to curb the debt-driven expansion of conglomerates such as HNA and the insurance company Anbang.

Growing household debt

Reducing risks in the real estate market is even more important for China as most of the family’s wealth is related to real estate, according to Moody’s estimates, from about 70% to 80%. The report added that about 10% of a family’s total income comes from real estate.

While the authorities have repeatedly stressed that “homes are for living, not speculation,” Chinese households’ greater preference for investing in real estate over stocks or other assets has contributed to the rise in property prices.

This, in turn, led to The debt of Chinese households will rise.

According to official figures, the balance of consumer housing loans has only increased over the past few years and stood at 36.6 trillion yuan at the end of June. The 13% year-on-year growth rate was lower than the 14.5% growth rate in 2020.

The real estate market’s failure to meet individual housing needs has contributed to the rapid rise in household debt, said Liu Xiangdong, deputy director of the economic research department at the China Center for International Economic Exchanges in Beijing.

He noted that China’s property problems are related to problems of the education system. Parents seeking to send their children to better schools have raised prices for nearby housing, and local authorities, such as in Beijing, have tried to push them away.

For Evergrande, residential development remains a core business, but the company has made it onto the Fortune Global 500 and has expanded into industries such as film and entertainment, life insurance and spring water. Evergrande supports the Guangzhou football team and has an electric vehicle division.

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