Evergrande Group breached its contract for the first time in the open market since its liquidity crisis.

On the evening of December 3, Evergrande Group said in a filing to the Hong Kong stock exchange it had received a demand from creditors to pay about 260 million USD, there is no guarantee that the group will have sufficient funds to continue to perform its financial obligations, and creditors may demand accelerated repayment if it does not. 

According to the official website of Guangdong provincial government, on the evening of December 3, Guangdong provincial government held regulatory talk with Mr. Xu Jiayin, chairman of the Evergrande. At the request of the company, to defuse risk effectively, protect interests of all parties, maintain the social stability, Guangdong government agreed to send a work group to Evergrande. The group will push forward Evergrande to deal with the risks, enhance internal management, and maintain its normal operations.

The news rushed to the hot search on the Internet and major media reposted it soon. The People's Bank of China (PBOC), the China Banking and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission (CSRC) and the Ministry of Housing and Urban-Rural Development also voiced their support.

Evergrande's crisis is a special case

Evergrande's breach of contract in the open market is not unexpected.

Ever since the liquidity crisis in August this year, Evergrande has encountered risks, including the failure to redeem overdue commercial bills, the collapse of Evergrande wealth products, and the suspension of its projects in various regions. Evergrande made effort on its own to maintain operations and promote the resumption of work and production, however, the results have not been significant.

According to the report on 21st Century Business Herald, Evergrande has set up a team to ensure the delivery of apartments. With the support of relevant local government departments in different regions, a few projects have resumed work and production in the past two months. However, a unnamed person in charge of a project of Evergrande in a unnamed city of Guangdong said that it would be very difficult to resume work and production if government departments do to give support in the coordination with suppliers and contractors.

The overseas debt default announced on December 3 pierced the thin window screening of Evergrande's "public default." Because of the large scale of Evergrande's overseas US dollar debt, the default will trigger a cross-default of other undue US dollar debt. Investors are very concerned about this. However, from the perspective of its development logic, this default is almost inevitable, and it is only a matter of time.

Evergrande is currently the company with the most significant debt crisis in China. According to the Interim Report of Evergrande Group (3333.HK) of China, as of the end of June 2021, Evergrande's interest-bearing liabilities, payables, and taxes payable have reached 1.76 trillion yuan. Financial debt accounts for about one-third of the Group’s debt, the structure is relatively scattered, and the amount of its financial investment is small.

With the fermentation of the liquidity crisis, Evergrande currently faces multiple difficulties in its operations.

If measured by the asset quality, Evergrande is likely to be graded "insolvent" judging from the actual value and liquidity of the assets, although its netbook assets are positive. As the crisis further intensifies, the debt repayment gap may continue to expand; in addition, the equity structure of Evergrande is highly complex, and its business are diverse, with both overseas listed companies and domestic operating entities, involving in real estate, new energy vehicles, financial investment, agriculture, health, etc. But its diversified investment gain the Group non profit, but only fame.

With the open market default, Evergrande became unable to save itself, its new financing has dried up, and sales revenue has plummeted. Under this background, Evergrande cannot meet the demand for debt repayment and has severe difficulties in maintaining the construction and daily operation of its real estate projects. There is also a huge hidden danger for it to deliver houses to buyers on time.

Evergrande’s risk today is entirely due to its own mismanagement and blind expansion and is a special case.

Send a work group to Evergrande Necessary

Although the Evergrande's liquidity problem is a special case, its subsequent risks may be further exposed, and a series of chain reactions may also occur. It is currently in the critical stage of dealing with the issue.

Many lawyers and investment professionals have reached a consensus that after the announcement, Evergrande's overseas bonds will face cross-default, and the market value of its listed companies and overseas bond prices may fall further, causing its various domestic types of foreign financing debts have accelerate their maturity. Moreover, creditors may also adopt litigation, preservation and takeover measures.

Affected by this, homebuyers may lose confidence in Evergrande, further affecting Evergrande's real estate sales. It may adversely affect daily operations, resumption of work and production, and guaranteeing the delivery of apartments and other buildings. More importantly, Evergrande's public default may hurt the credit ratings and overseas financing of other real estate companies. Therefore, when Evergrande has difficulties in actual operations, and the crisis involves a wide range of situations, it is necessary for government departments to fully communicate with relevant parties and take active measures.

Guangdong Provincial Government immediately held a  regulatory talk with the actual controller of the company, showing the government’s highly attention on this issue.

The government dispatched a work group at the request of the actual controller of the enterprise, aiming to resolve risks, protect the interests of all parties, and maintain social stability. The working group’s primary task is to supervise and push forward the enterprise’s risk resolution and supervise the enterprise to effectively strengthen internal control management and maintain normal operations.

It is worth pointing out that Evergrande is a leading company in the real estate industry. Considering its scale and influence, the risk will be complex. It has been four months since the rumors of Evergrande's liquidity crisis. During this period, Evergrande has also made efforts, but failed to resolve it. Dispatching a work group became a necessary measure.

The government decisively stands on the front line of risk response and disposal work, aiming to give home buyers and creditors confidence. It will undoubtedly have a positive effect on risk response and disposal. The work group does not replace the Evergrande’s management team, nor does it mean that Evergrande is transferred to state control. With the help of the work group, Evergrande's crisis issue will develop in a positive direction, and home buyers and creditors should have confidence in this.

China's real estate industry maintains a stable development

After Guangdong provincial government sent a work group to Evergrande, a small number of real estate companies that have encountered liquidity risks have also attracted much attention.

Some real estate companies have recently encountered liquidity risks, and some of them have announced defaults in the open market. Since those companies have different risks in their operation and debt situations. Hence the government might take flexible measures to intervene in the resolution of corporate risks.

According to an official of the Department of Housing and Urban-Rural Development of Guangdong, the government  sending work group to Evergrande is only an individual case and it would not be “reproduced” for the time being.

On the whole, the liquidity risk of Evergrande and a small number of real estate companies cannot affect the stable and healthy development of the entire real estate industry. The regulatory authorities believe the individual case in real estate market will pose little impact on the market as the risks can be controlled.

On December 3, authorities from the PBOC, the CBIRC and the CSRC also made announcements to support the steady and healthy development of the real estate industry.

The PBOC said that the short-term risks of individual real estate companies would not affect the normal financing function of the medium and long-term market. Recently, the domestic real estate sales, land purchases, financing, are in normal status. Some Chinese real estate companies have begun to buy back overseas bonds. Some investors are buying China real estate enterprises’ US dollar-denominated bond.

A spokesperson for the CBIRC stated that, in line with specific circumstances of different localities, the priority goes to satisfying the mortgage demand of the buys on their first home as well as of homeowners with living environment improvement needs. Development loans and merger and acquisition loans will be extended properly, and support to the low-rent public housing projects will be enhanced.

To promote the stable and sound development of both the capital markets and real estate industry in China, the CSRC said it will continue to maintain the effective fund-raising function of the country's capital markets and support the normal financing needs of real estate companies.

At present, the confidence of the market has gradually recovered. For example, the Goldman Sachs portfolio management team said in a recent interview with the media that it is buying bonds from Chinese real estate companies. Data by the CBIRC also showed that at the end of October 2021, real estate loans by banking financial institutions increased by 8.2% year on year.

China is also responding to the reasonable financing needs of real estate companies. It is said that the CSRC will work together with relevant departments and local governments to maintain the stable and sound development of the real estate market, support real estate companies to issue bonds and finance rationally, and maintain a healthy bond financing channels for real estate companies.