China Pulls Out the Big Guns to Avert Evergrande-Fuelled Disaster

China is mobilising its big guns to avert a financial disaster if China Evergrande collapses under the weight of its huge debts.

The central bank said it would backstop homebuyers whose investments are threatened by the developer’s dire financial troubles after injecting more cash into the banking system.

And authorities are prodding government-owned firms and state-backed property developers such as China Vanke to purchase some of Evergrande’s assets in a bid to plug its $305 billion debts. An investigation has also been launched in Guangdong into in developer’s wealth management unit.

These moves are the clearest sign yet that authorities are moving to contain contagion risks as Evergrande’s failure to settle an interest payment on a bond threatened to reverberate through China’s financial system.

FLEXIBLE POLICY

The People’s Bank of China (PBOC) made no mention of Evergrande in a statement posted on its website, which contained just a line on housing along with promises to make its monetary policy flexible, targeted and appropriate.

But at a delicate moment for the world’s most indebted developer, which missed a bond interest payment last week and has another due this week, its pledge to “safeguard the legitimate rights of housing consumers” hinted at the sort of response markets had begun to hope for.

The PBOC’s broad-ranging statement was issued after the third-quarter meeting of its Monetary Policy Committee. Its housing line echoed comments from Evergrande’s leadership that point to containment efforts and prioritising small investors in properties before foreign holders of Evergrande debts.

“We expect that any impact to the banking system will be manageable and that the government will instead focus on the social fallout of unfinished housing units,” said Sheldon Chan, who manages T Rowe Price’s Asia credit bond strategy.

In a letter to investors seen by Reuters, the Shenzhen Financial Regulatory Bureau said “relevant departments of the Shenzhen government have gathered public opinions about Evergrande Wealth and are launching a thorough investigation into related issues of the company”.

It is also urging China Evergrande and Evergrande Wealth to work to repay investors, the letter said, which was sent following investor demands for an inquiry.

BAILOUT UNLIKELY

Once the epitome of an era of helter-skelter borrowing and building in China, Evergrande has now become the poster child of a crackdown on developers’ debts that has left investors large and small sweating over their exposure.

But the central government is unlikely to intervene directly to resolve Evergrande’s crisis in the form of a bailout, according to six people, including four in government and regulatory bodies.

Authorities are hoping, however, that asset purchases will ward off or at least mitigate any social unrest that could occur if Evergrande were to suffer a messy collapse, they said, declining to be identified due to the sensitivity of the matter.

A handful of government-owned enterprises have already done due diligence on assets in the southern Chinese city Guangzhou, said one person.

In one emblematic example, Guangzhou City Construction Investment Group is close to acquiring Evergrande’s Guangzhou FC football stadium and surrounding residential projects, according to the person, who has direct knowledge of the matter.

Set to cost around 12 billion yuan ($1.9bn), the stadium has been designed to seat more than 100,000, making it the world’s largest venue built for soccer by capacity.

POTENTIAL ASSET BUYERS

Potential buyers of Evergrande’s core assets in Guangzhou have been “arranged” with “both political and commercial considerations” in mind, the person said, adding that authorities don’t want to see just a few companies bidding for the same assets.

Evergrande and Guangzhou City Construction Investment Group did not immediately respond to requests for comment. The state assets regulator, the State-owned Assets Supervision and Administration Commission (SASAC), also did not immediately respond to requests for comment.

Vanke and China Jinmao Holdings are among government-backed property developers that have been asked to purchase assets from Evergrande, sources said. China Resources Land has also been asked, one source said.

Property developers and government-owned firms have been sounded out either directly or indirectly about asset purchases, the sources said. Reuters could not immediately ascertain the current status of most of those discussions.

Vanke, which is one-third owned by Shenzhen’s state-owned subway operator, said in August it has talked with Evergrande about cooperating on various projects. It did not respond on Tuesday to a request for comment on the status of those discussions. Jinmao and China Resources Land also did not respond to requests for comment.

While expectations are high that it will undergo one of the largest-ever restructurings in China, government bodies have been largely silent on the potential for a bailout or how they might deal with a collapse.

CRISES ON MANY FRONTS

Authorities are busy trying to quell crises on multiple fronts on concern they may spill over into social unrest that could challenge the ruling Communist Party. The economy is slowing, partly fuelled by contagion fears from Evergrande, and an energy crunch caused by a shortage of coal threatens to deprive millions of electricity.

China’s State Grid said it will intervene to ensure power supplies to residents amid the energy crunch in the world’s second-largest economy. The organisation will also make preparations ahead of the upcoming national holidays and the winter that threaten to cut off power to millions.

One person with direct knowledge of local involvement said local governments had been asked to mediate with state-backed groups and companies so they can participate in Evergrande’s reorganisation and asset sales.

Any action taken by local governments will depend on the extent of Evergrande’s presence in those areas and the local finances of that particular province or city, the sources also said.

They added that regulators will first assess the funding situation of all Evergrande’s businesses before taking any action on its liquidity situation. “What kind of committee should be set up is a second story; it depends on the debt situation,” one regulatory source said.

EV UNIT

Evergrande’s stock rose 8% on Tuesday, though at HK$2.55 it isn’t far above last week’s decade-low of HK$2.06 and stock borrowing costs have surged as short sellers pile in.

Shares of its electric car unit fell heavily after it warned of an uncertain future.

The focus now turns to whether a coupon payment of $47.5 million due on Wednesday is made, and then to whether China can contain the economic damage if Evergrande collapses.

Its struggles so far to pay suppliers and sell assets have already begun to dent confidence among homebuyers and force sector-wide price cuts, signalling that consolidation – at the very least – looms for the real estate industry.

“Evergrande’s potential credit event, in our view, is part of a ‘survival of the fittest’ test in China’s property sector,” Deutsche Bank strategist Linan Liu said in a note to clients.

“Allowing orderly exits by weaker players in the property sector, while painful, is necessary to improve overall leverage conditions in the sector and bring about a soft landing.”

BONDS PLUMMET

Suppliers exposed to Evergrande payables and domestic bondholders would also take priority over dollar bond holders, he said.

Evergrande dollar bonds have been trading accordingly, and remained on Monday at distressed levels around 30 cents on the dollar.

Research firm Morningstar listed BlackRock, UBS, Ashmore Group and BlueBay Asset managers as bondholders with exposure to Evergrande in a report on Friday that said funds at HSBC and TCW had closed positions.

BlueBay said its position was small and had been reduced through September. Ashmore, BlackRock, HSBC, TCW and UBS declined to comment.

• Reuters with additional reporting by Mark McCord