China facing a 'ticking time bomb' with debts says expert
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The Chinese developer Evergrande, which is teetering on the brink of defaulting and currently owes around $300 billion (£217.8bn), managed to make a last-gasp payment just before a grace period expired on Friday. Reuters report two sources with direct knowledge of the matter confirmed the payment of $47.5 million (£34.49m) was made just in time to avoid a major default which could have pushed the company over the edge- which could have caused a domino effect on the market and spelt disaster for major firms.
Despite meeting the deadline, the news has done little to reassure investors with shares falling 0.8 percent on Friday morning.
Evergrande currently owes money to around 171 domestic banks and 121 financial firms meaning defaulting on its debt would quickly have far reaching effects.
The issues facing the company have sent shockwaves for the industry, with growing fears that a collapse could lead to a credit crunch – where banks and other lenders are forced to lend less, leaving companies struggling to borrow money.
The news has led to comparisons to the 2008 financial crisis, as Evergrande was likened to collapsed US bank Lehman Brothers.
The source of Evergrande’s funding for the latest interest payment is not known, but China’s problems are said to be causing a headache for President Xi Jinping, who is frantically “wrestling with how to keep the economy on track”.
The struggles of Evergrande are already spilling over into China’s property industry with angry suppliers having to shut down construction sites and building projects left unfinished.
Globally Evergrande owes around $7.4 billion (£5.37bn) to foreign investors so a full collapse of the company could prove a major blow to market confidence around the world.
Last month HSBC boss Noel Quinn raised concerns about the situation saying it would be “naive” to underestimate potential market turmoil.
Back in China the knock on effects for the sector are notable with around a third of property developers predicted to struggle to repay their debts in the next 12 months according to a report from credit rating agency S&P this week.
The report describes the situation in the Chinese housing market as “unusually intense” adding: “We believe that defaults will rise as firms enter a prolonged down cycle.”
A collapse of Evergrande would also raise serious questions for over 1,300 real estate projects the company is involved in across 280 cities.
There is also uncertainty over the role the Chinese government is playing with China’s central bank previously describing the situation as “controllable” but there has been little clear indication of any role Beijing might play in a resolution.
A source involved in the situation told the Financial Times: ““This is going to be very opaque — no one’s going to be telling the offshore bondholders what the position is in China.”
AJ Bell Investment Director Russ Mould told Express.co.uk: ““Evergrande’s interest payment will soothe some nerves but neither the company, the Chinese economy nor investors are out of the woods just yet.”
“President Xi and his colleagues are still wrestling with how to keep the economy on track while stopping the housing, property and stock markets from overheating and it is a very tricky balancing act.”
“Right now, policy might not be tight enough to cool financial markets but may be too tight for the ‘real’ economy, especially given how debt levels have mushroomed in China over the past decade – even minor changes in borrowing costs could have a big impact.”
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Founded in 1996 Evergrande grew to become a behemoth of the Chinese economy becoming one of the worlds most valuable real estate firms.
Tapping into China’s booming property market it played a major role in the development of cities such as Beijing, Shanghai and Shenzhen.
However since then it has become the world’s most indebted developer with more than $300 billion (£217.8bn) worth of liabilities.
On September 23rd this year it missed the first of its coupon payments subsequently also missing deadlines on September 29th and October 11th beginning a 30 day grace period for each which so far it has narrowly been meeting.
There are still remaining payments amounting to nearly $338 million (£245.42m) to come though due in November and December.
It is thought Evergrande may seek to sell offshore assets to raise funds for its creditors while there are also rumours the Chinese government has put pressure on the company’s billionaire chair Hui Ka Yan to dip into his own pocket to help the company.
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