Monday, October 3, 2022

Chinese real estate company accepts state loan to avert default

Tackling China’s debt overhang may be a top policy priority but negotiations between the government and a banking conglomerate over unpaid debts have made little progress. The statement underscores that disagreements remain over how debt is measured, and under what conditions defaults are permissible.

Evergrande Group, a publicly traded real estate and financial company, on Friday accepted a “cure-and-repay” offer from its state-owned subsidiary Everbright Bank. Evergrande blamed the near default on its failure to make scheduled interest payments.

Under the agreement, Evergrande will pay at least 2 billion yuan ($301 million) to avoid a potential default this week, according to Bloomberg.

Evergrande, which has more than 100 billion yuan in debt, is a subsidiary of China Everbright Group, the most valuable among the country’s state-run conglomerates, according to Reuters.

Beijing currently regulates the amount of leverage a firm can use, including debt-to-equity ratios, using guidelines issued in 2012. But those guidelines are not set in stone and can be easily circumvented, making an effective management of debt very difficult, economists say. In the absence of government guidance, creditors tend to be beholden to their lender.

One “key cause of credit difficulty and deleveraging,” analysts with the ratings agency S&P Global said in a June report, is the apparent willingness of financial firms to handle defaults as “mere administrative and administrative measures.”

“As such, we have little confidence that any company that has a liquidity issue will receive fair treatment from a creditor-owner or regulator,” the S&P analysts said in their report.

Evergrande’s problem illustrates the difficulties facing Chinese policymakers as they try to make debt private sector debt manageable. Central bank governor Zhou Xiaochuan, who oversees China’s banking system, said in March that the government must support financial institutions in efforts to manage public debt without creating excessive risk.

The government’s inability to clamp down on private debt, says Bank of America Merrill Lynch in a note Monday, has “led to rising liquidity concerns.” That has sparked market volatility, the bank added.

Today, Evergrande stock was up 0.76 percent in Hong Kong trading.

Read the full story on The Wall Street Journal.


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