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The People’s Bank of China broke its silence on China’s Evergrande Group’s debt crisis, saying that the risks to the financial system caused by the developer’s plight are “controllable” and unlikely to spread.
Zou Lan, an official of the People’s Bank of China, said at a press conference on Friday that the authorities and local governments are addressing this issue based on “market orientation and rule of law principles.” The central bank has required lending institutions to maintain “stable and orderly” credit to the real estate industry, said Zou, the head of the Financial Markets Department.
As President Xi Jinping takes strict measures to cool the real estate market, people are increasingly worried that Evergrande’s cash crunch is spreading to other developers. Concerns about contagion have intensified in the past two weeks after Fantasia Holdings Group Inc. unexpectedly defaulted and Xinli Holdings Group Co. warned that its breach was imminent.
“In recent years, the company has failed to do a good job in business management and prudent operation in the ever-changing market environment,” said Mr. Zou when talking about Evergrande. “On the contrary, it expands and diversifies blindly.”
Zou said the central bank is urging real estate companies and their shareholders to fulfill their debt obligations. He added that the collapse of developers’ offshore dollar bonds was the market’s natural response to defaults.
Zou also said:
- The Chinese government insists not to use real estate as a short-term economic stimulus
- Urban real estate prices are soaring, mortgage restrictions help curb
- Recently, credit problems of some developers have led to a decline in real estate investment, but this is a normal market phenomenon
- Some banks have misunderstood the macro-prudential policies of the real estate industry.
“This is the strongest signal so far that the authorities will not bail out the creditors of Evergrande and other developers,” said Travis Lundy, a special circumstances analyst who published an article on Smartkarma. He added that their position is that they will not take any measures to boost real estate, except for small steps such as speeding up housing loan processing and working to reduce bank mortgage limits.
According to a Bloomberg report earlier on Friday, financial regulators have asked some major banks to speed up mortgage approvals in the last quarter. According to people familiar with the matter, lenders were also allowed to apply for the sale of securities backed by residential mortgages to release loan quotas, thereby relaxing the ban imposed earlier this year.
In recent weeks, Evergrande’s bonds and stocks have plummeted, and the sell-off has spread to other real estate developers, causing the country’s riskier bill yields to soar to 20%. The developer’s offshore bond trading price is about 20 cents per dollar, indicating that investors are betting on default. The stock has plunged 80% this year, and has been suspended in Hong Kong in the past two weeks, awaiting news of the possible sale of its property services division.
The central bank’s criticism of Evergrande’s “blind” expansion strategy does not bode well for billionaire founder Xu Jiayan. In the past difficulties, the Hui can rely on the help of his tycoon friends and the support of the local government. This time, with debts exceeding US$300 billion and the company’s asset prices plummeting, Xu seems to be lonelier than ever.
Sales decline
The Evergrande crisis has led to a decline in the mood of home buyers. An estimated 1.6 million households have made deposits for Evergrande apartments that have not yet started construction. According to data from China Real Estate Information Group Corporation, the sales of the top 100 real estate companies in the country fell 36% year-on-year in September.
According to Goldman Sachs Group Inc., this puts pressure on the Chinese economy, which relies on the wider real estate industry for nearly a quarter of its GDP. GDP growth in the third quarter may slow to 5% from 7.9% in the first three months, according to economists surveyed before the government data released on Monday.
Zou said that the regulator will ensure financial support is provided so that Evergrande’s real estate project can be resumed. He said that the rapid expansion of developers “resulted in a serious deterioration in their financial indicators, and eventually risks exploded.”
Patrick Huang, a real estate analyst at Bloomberg Industry Research, said: “The central bank is making it clearer that its focus is to ensure that Evergrande accelerates asset disposal and resumes normal construction of its projects.”
At the same time, Hong Kong regulators began to investigate Evergrande’s financial reports in an investigation that will also investigate the work done by PricewaterhouseCoopers. According to an email statement on Friday, the Financial Reporting Committee has initiated investigations into Evergrande’s 2020 annual accounts and 2021 interim report.
In a rare public condemnation in August, the central bank asked Evergrande to resolve its debt problems after meeting with developer executives and avoid spreading “untrue” information.
According to an earlier report by Bloomberg, in September, regulators issued a series of extensive instructions to developers, requiring developers to take all possible measures to avoid the recent default of USD bonds, while focusing on completing unfinished properties and repaying individual investors. .
(Update the analyst’s comment in the seventh paragraph)
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