The latest sign of tumult in China’s sprawling housing sector is emerging, as a $16 billion rescue package is extended to shore up one of China's largest developers, Evergrande Real Estate Group by Chinese Banks.
Bogged down by a growing supply of unsold homes, developers are dashing to secure financial support even as sales volumes and housing prices plunge.
Once a favorite with foreign investors, The Kaisa Group was near default over its offshore debt this year, prior to being rescued by another developer.
Evergrande racked up a debt of about $24 billion by the end of June, with another $7 billion in equity bonds. Though Evergrande’s sales last year hit more than $20 billion, it borrowed heavily in US dollars in the offshore market, from foreign investors, debts that will it more expensive to repay as the renminbi weakens.
Credit line for the $16.2 billion will come from mainly state-run banks - Bank of China, Agricultural Bank of China, Postal Savings Bank of China and privately controlled China Minsheng Bank. Analysts deem the billion dollar lifeline a short-term relief which would fail to address the company’s deeper problems.
The company has been under financial distress for a long time. Mounting debts and slumping sales “are fundamental challenges that can’t be resolved short term by government’s bailing them out on ‘too big to fail’ pretense,” said Junheng Li, head of research at JL Warren Capital in New York.
The Chinese leadership is concerned about the state of its property market as this sector is strongly intertwined to other sectors like steel consumption, loan growth and jobs for construction workers. A drop in home prices hurts ordinary Chinese because they tend to invest a disproportionate amount of their savings in real estate.
China’s property market figures show that prices fell in February in 66 of the 70 cities surveyed when compared with a year earlier. Data released last week showed that new housing starts, measured by floor space, fell 20% in the first two months of the year compared with a year earlier, while new land purchases by developers fell 32%.
The market is still undergoing a pretty rough time and for developers is that the operating environment will remain tough,” according to Moody’s Investors Service in Hong Kong.
Evergrande, founded in 1996 by Mr. Hui Ka Yan, started as a builder of middle-class homes with projects in Guangzhou, in southern China, before expanding nationally to more than 100 cities.
This month, Evergrande had a run-in with the Australian government for illegally acquiring the Villa del Mare mansion in Sydney through a host of shell companies. Foreign investors can build new homes but are barred from buying existing ones.
Evergrande has 90 days to find a buyer for the $30 million mansion property.
Source: New York Times