Fears of a contagion from the potential collapse of battered Chinese land giant Evergrande sent property shares plunging in Hong Kong on Monday, with the firm expected to default upcoming interest payments in the week .
The firm, one among the country’s biggest developers, is on the brink of collapse because it wallows in debts of quite $300 billion, raising concerns of a spillover into the domestic and global economy.
The crisis has triggered rare protests outside the company’s offices in several Chinese cities by investors and suppliers — a number of whom claim they’re owed the maximum amount as $1 million — demanding their money.
Adding to the anger, it emerged at the weekend that six top executives would face “severe punishment” for redeeming financial products before telling retail investors that the firm couldn’t pay them on time.
The firm said they need to return the cash they redeemed “within a time limit”, adding that its investment arm must “strictly follow the announced repayment decide to ensure fairness and impartiality”.
The crisis sent shares within the firm diving around 17 percent Monday, leaving it down around 90 percent from the beginning of the year.
Other property firms were also within the firing line, with Henderson Land losing and New World Development each around 12 percent lower. Sun Hung Kai Properties shed nine percent.
Meanwhile, insurance giant Ping An lost around eight percent. China Minsheng Bank, Agricultural Bank of China and Industrial and full service bank of China were all down around three to 5 percent.
The dash for the exit left the Hang Seng Index down quite four percent.
Analysts say a scarcity of comment from Beijing and a vacation in China are only adding to the uncertainty.
Analyst Philip Tse, of BOCOM International Holdings, warned “there are going to be further downside” unless leaders provides a clear signal on Evergrande or eases abreast of its clampdown on the important estate sector, Tse said.
Attention is now on the company’s repayments, with interest due on bank loans Monday and two bonds on Thursday.
Debt mountain
However, one creditor quoted by Chinese financial outlet Caixin Global Monday estimated that there’s a “99.99 percent” chance Evergrande won’t be ready to pay interest due within the third quarter.
As of end June, the property developer had total liabilities of just about 2 trillion yuan ($309 billion) — roughly like two percent of China’s GDP — with an unknown amount of off-sheet debt.
The giant debt mountain helped drive Evergrande’s voracious expansion, which started with a 1990s property boom and lasted until Beijing moved to trim leveraged growth within the sector by introducing curbs in 2020.
While predominantly a true estate firm, the group also began an all-out diversification, buying football club Guangzhou FC, opening amusement parks, fixing Evergrande Spring drinking water and also investing in tourism, digital operations, insurance, and health.
But it’s come unstuck as Beijing cracked down on developers during a bid to looked to force them to dump debt, introducing “three red lines” to curb leverage last year.
It introduced a ban on selling properties before they’re completed — a serious a part of Evergrande’s business model.
Tremendous pressure
Experts say the firm has quite 1,000,000 units pre-paid by customers yet to be built, adding to the sense of dread among Chinese investors, many of them first-time buyers.
The company last week admitted it’s under “tremendous pressure” and should not be ready to meet its liabilities. Its credit rating has been cut several times by ratings agencies.
With access to lending markets now stop and no money to finish developments and repair its debts, the firm has been trying new ways to satisfy its responsibilities including offering parking spaces and unfinished properties.
Still, while leaders are looking to curb excessive risk-taking, there’s a general belief they’re going to work to stop the difficulty from becoming unmanageable and driving a hole through the already stuttering economy.
“The central government’s priority of social stability makes restructuring likely with haircuts for debt holders, but spillovers to other listed property developers means there’ll likely be a true economy impact on the important estate sector,” said National Australia Bank’s Tapas Strickland.