Fears of a contagion from the potential collapse of battered Chinese real estate giant Evergrande sent property shares plunging in Hong Kong on Monday, with the firm expected to default on upcoming interest payments this week.
The firm, one of the country's biggest developers, is on the brink of collapse as it wallows in debts of more than $300 billion, raising concerns of a spillover into the domestic and global economy.
The crisis has triggered rare protests outside the company's offices in several Chinese cities by investors and suppliers — some of whom claim they are owed as much as $1 million — demanding their money.
Adding to the anger, it emerged at the weekend that six top executives would face "severe punishment" for redeeming financial products before telling retail investors that the firm could not pay them on time.
The firm said they must return the cash they redeemed "within a time limit", adding that its investment arm must "strictly follow the announced repayment plan to ensure fairness and impartiality".
The crisis sent shares in the firm diving around 17 percent Monday, leaving it down around 90 percent from the start of the year.
Other property firms were also in the firing line, with Henderson Land losing and New World Development each around 12 percent lower. Sun Hung Kai Properties shed nine percent.
Meanwhile, insurance giant Ping An lost around eight percent. China Minsheng Bank, Agricultural Bank of China and Industrial and Commercial Bank of China were all down around three to five percent.
The dash for the exit left the Hang Seng Index down more than four percent.
Analysts say a lack of comment from Beijing and a holiday in China are only adding to the uncertainty.
Analyst Philip Tse, of BOCOM International Holdings, warned "there will be further downside" unless leaders give a clear signal on Evergrande or eases up on its clampdown on the real estate sector, Tse said.
Attention is now on the company's repayments, with interest due on bank loans Monday and two bonds on Thursday.
– Debt mountain –
However, one creditor quoted by Chinese financial outlet Caixin Global Monday estimated that there is a "99.99 percent" chance Evergrande will not be able to pay interest due in the third quarter.
As of end June, the property developer had total liabilities of almost 2 trillion yuan ($309 billion) — roughly equivalent to two percent of China's GDP — with an unknown amount of off-sheet debt.
The giant debt mountain helped drive Evergrande's voracious expansion, which started with a 1990s property boom and lasted until Beijing moved to trim leveraged growth in the sector by introducing curbs in 2020.
While predominantly a real estate firm, the group also embarked on an all-out diversification, buying football club Guangzhou FC, opening amusement parks, setting up Evergrande Spring mineral water and also investing in tourism, digital operations, insurance, and health.
But it has come unstuck as Beijing cracked down on developers in a bid to looked to force them to offload debt, introducing "three red lines" to curb leverage last year.
It introduced a ban on selling properties before they are completed — a major part of Evergrande's business model.
– 'Tremendous pressure' –
Experts say the firm has more than a million units pre-paid by customers yet to be built, adding to the sense of dread among Chinese investors, many of them first-time buyers.
The company last week admitted it is under "tremendous pressure" and may not be able to meet its liabilities. Its credit rating has been cut several times by ratings agencies.
With access to lending markets now cut off and no money to complete developments and service its debts, the firm has been trying new ways to meet its responsibilities including offering parking spaces and unfinished properties.
Still, while leaders are looking to curb excessive risk-taking, there is a general belief they will work to prevent the issue from becoming unmanageable and driving a hole through the already stuttering economy.
"The central government's priority of social stability makes restructuring likely with haircuts for debt holders, but spillovers to other listed property developers means there will likely be a real economy impact on the real estate sector," said National Australia Bank's Tapas Strickland.
"To what extent Evergrande slows the growth momentum remains unclear."
Hong Kong leads Asian sell-off as Evergrande fears spread
Hong Kong (AFP) Sept 20, 2021 –
Asian markets fell Monday on fears about contagion from a possible collapse of teetering property giant China Evergrande, while sentiment was also dragged by the Federal Reserve's plans to taper monetary policy, surging Delta infections and signs of a weakness in the global recovery.
Hong Kong again led the losses with Evergrande due to pay interest on some of its loans and bonds this week, with observers expecting it to default.
Uncertainty about the future of the company, which is drowning in debts of more than $300 billion, has shattered confidence on trading floors, with property companies and banks in Hong Kong taking the brunt of the selling.
Hong Kong ended the morning almost four percent down, with Evergrande almost 17 percent down while New World Development and Henderson Land each lost more than 10 percent.
Analyst Philip Tse, of BOCOM International Holdings, warned "there will be further downside" unless leaders give a clear signal on Evergrande or ease up on their clampdown on the real estate sector.
Despite the growing crisis, the government has yet to step in to prevent Evergrande from going under.
Analysts say that, while leaders are looking to curb excessive risk-taking, they will probably work to prevent the issue from becoming unmanageable.
"The central government's priority of social stability makes restructuring likely with haircuts for debt holders, but spillovers to other listed property developers means there will likely be a real economy impact on the real estate sector," said National Australia Bank's Tapas Strickland.
"To what extent Evergrande slows the growth momentum remains unclear."
The selling was mirrored elsewhere in Asia.
Sydney was down two percent, with miners also being hammered by a plunge in iron ore prices, while Singapore, Wellington, Mumbai, Manila, Bangkok and Jakarta were also down. Tokyo, Shanghai, Seoul and Taipei were closed for holidays.
The selling followed another loss on Wall Street, where investors are tracking the progress of Joe Biden's multitrillion-dollar spending bills, while there is unease that lawmakers have yet to raise the US debt ceiling, risking the country defaulting on its own obligations.
The Fed's policy meeting this week is being closely followed, with some experts predicting it could set a timetable for winding in its vast bond-buying programme put in place last year to support the economy and equity markets.
Officials have flagged they will begin tapering by the end of the year in order to keep a lid on inflation, though it is yet to indicate by how much and from when.
Wednesday's announcement comes as several other central banks around the world also prepare to make decisions, with many now considering tightening.
The shift towards turning off the taps to financial markets comes as the Delta variant continues to spread quickly around the world, forcing some governments to reimpose lockdowns or other strict containment measures.
Among them is China, where a new outbreak is raising concerns about the effect on the recovery in the world's number-two economy, a key driver of global growth.
