China’s Evergrande bankruptcy filing an expected part of debt restructuring plan, unlikely to have contagion effect on economy: Observers
The firm was once China's top-selling developer, but has become the face of its property sector debt crisis as the most indebted property developer globally, with over US$300 billion in debt.
SINGAPORE: The bankruptcy filing by Chinese developer China Evergrande Group is not a surprise as it is an expected part of its debt restructuring plan, experts said on Friday (Aug 18).
The embattled developer had filed for protection from creditors in a US bankruptcy court the day before.
The move is also unlikely to have a contagion effect on the wider Chinese economy, as the ongoing economic slump is largely driven by other factors such as export demand, they said.
The property sector accounts for roughly a quarter of China’s economy.
Evergrande was once the country’s top-selling developer, but has become the face of China’s property sector debt crisis, after falling into a liquidity crisis in the middle of 2021. It is currently the most indebted property developer globally, with over US$300 billion in debt.
PART OF RESTRUCTURING PLAN
Experts told CNA that the bankruptcy filing is part of a debt restructuring plan rather than a signal of wider financial turmoil.
Mr William Ma, chief investment officer of GROW Investment Group, told CNA’s Asia Now on Friday that the filing was “not totally surprising”, and noted that there is currently a rebound and positive stock performance in the property sector.
“If we wind the clock back a little bit, actually Evergrande kind of suspended its equity trading since March last year, to buy time for the debt restructuring,” he said.
He said the company has been undergoing a debt restructuring plan since March this year, and also announced its earnings a few weeks ago.
“Filing Chapter 15, from my perspective, is part of the restructuring process. And actually this is positive news from a broader perspective because they are dealing with it in a global institutionalised way,” said Mr Ma.
He added that if the firm can complete their unfinished projects, it would regain buyers’ confidence in the home property sector.
It is currently estimated that up to 300 billion yuan (US$41.2 billion) is needed for them to complete their unfinished projects, said Mr Ma.
The Chinese government is providing support through its central bank, the People's Bank of China, by extending loans to most property developers for another 12 months, he said.
Mr Ross Gerber, co-founder, president and CEO of Gerber Kawasaki Wealth and Investment Management, said: “What is worrisome is we really don't know how bad the debts are in China for so much property that has been overbuilt in China and not being used.”
Chinese investors are starting to feel the pain of making investments in these properties that are now not paying off, he told CNA’s Asia First on Friday.
“So not only do I worry that China has begun a deflationary spiral, but they are certainly in a recession and really at risk of social unrest at this point,” said Mr Gerber, noting that the country is facing a “huge amount” of unemployment.
He said the Chinese government is going to have to “eat these losses one way or another”.
“I don't think the people are going to be that excited when so many people made so much money during the good days in China and now, the people are really going to suffer through these bad days under Xi's really poor management of China,” said Mr Gerber.
“The good news is I think it puts America back in the driver's seat and the global economy.”
RISK OF CONTAGION
Mr Francis Tan, investment strategist at UOB, told CNA’s Asia First that while the knock-on effect can already be seen in China’s property and real estate sector, it is unlikely to extend to the broader Chinese economy.
“Bankruptcy is one thing, but if you look at it from the fixed income side (and) if you look at the entire Chinese property developers’ fixed income for the bonds, already 60 per cent has defaulted. So I would say that if you are thinking about the contagion within the property and real estate industry, it is already there,” he noted.
The economy is however suffering more from the lack of export demand from the rest of the world than the property sector, though the people may feel the impact of the property crisis if it prolongs, added Mr Tan.
The situation is already improving compared to late 2022 and early this year, said Mr Ma.
“There is some disbelief in the market if you look at the sales volume going down (and) the prices going down. But at the same time, there are more and more unfinished houses being finished and delivered to the buyer. The confidence will be coming back and I think we are in the middle of it,” he said.
Mr Ma also noted that while China’s largest private developer Country Garden missed some interest payments this month, the circumstances are different.
Evergrande already suspended stock trading in March last year, but Country Garden is still trading, which explains the price dropping, he said.
“But having said that, in terms of size and scale and everything, most developers are in the same cycle. They are trying to finish the unfinished projects (and) trying to get an extended loan from the domestic bank. And this is the key criteria,” he explained.
IMPLICATIONS FOR CHINESE HOMEOWNERS
China’s estate asset class, valued at about US$60 trillion, is the largest asset class in the world, noted Mr Ma.
He said the ongoing property crisis will change the Chinese mindset of owning a home to pass down to the next generation.
In the longer term, domestic Chinese investors will also learn not to place all their eggs in one basket - the real estate sector.
“It is estimated about 80 per cent of people's net worth is in real estate. But over the last year or two, we are seeing, when we talk to the investors in China, they start formulating (and) want to diversify their asset class from property to other asset classes,” said Mr Ma.
“I believe this is good for the asset management industry, and this is good from the domestic investor perspective.”
Economies around the world thrive around real estate development as it employs many people, uses a lot of resources and boosts economies, noted Mr Gerber.
“So in any growing economy, you see cranes and you see construction and building and in China's case, they really pumped up construction for a long time and really had great employment numbers and everything for a very long time,” he said.
He compared the ongoing Chinese property crisis to the situation in the US where people are vacating office buildings, which have become in effect “worthless”.
“I think China has gotten itself into a pretty big pickle here economically, and it reminds me very much of the financial crisis in the United States,” said Mr Gerber.
