Chinese real estate giant Evergrande says it has an agreement with investors to repay interest owed. The deadline for that refund was tomorrow. Evergrande is on the brink of bankruptcy, and that is weighing on the stock markets worldwide.
Financial markets have plummeted on fears that the Chinese concern could collapse, threatening to derail the world’s second-largest economy.
In a statement to the stock exchange of the southern Chinese city of Shenzhen, Evergrande affiliate Hengda says a plan has been negotiated to pay the interest owed on its 2025 bond. That deadline expires typically tomorrow, September 23.
According to Bloomberg News, this concerns an amount of 232 million yuan or 30.5 million euros. Small beer compared to the total debt mountain of 260 billion euros that the real estate giant has to carry on its shoulders. Nothing is known about a refund to foreign investors.
According to analysts, this refund should soothe the worried markets in the short term. That seems to work: the Tokyo stock exchange closed today with a more minor loss than in previous days. But more is needed. For confidence to return in a more meaningful way, the market will need to understand the comprehensive restructuring plans for Evergrande.
It is hoped that the agreement will also ease the unrest among the staff. In a letter to his employees, Xu Jiayin, who founded the group in 1996, wrote that he firmly believes that Evergrande will soon get out of this difficult period.
Meanwhile, the Evergrande crisis has already sparked rare protests outside the company’s offices in China by investors and suppliers demanding their money. Some claim that they have up to 1 million euros in credit.
Evergrande employs 200,000 people, has a presence in more than 280 Chinese cities and claims to have indirectly created 3.8 million Chinese jobs. It is primarily a property developer but has been buying on a large scale for over ten years.
Evergrande may not be a bank like Lehman Brothers back then, but bankruptcy would have profound consequences for China’s economy, just about the main growth engine of the world economy. Significantly, the company hired experts from financial services firm Houlihan Lokey, which also advised on the restructuring of Lehman Brothers.
Housing is an essential component of the Chinese economy, and just like the Belgian, the Chinese also have a brick in the stomach. There have been warnings for years about the bursting of the Chinese real estate bubble. An Evergrande bankruptcy could set the dominoes in motion and also threaten to endanger China’s internal stability.
There are signs that the Chinese government would now be prepared to intervene and limit the damage precisely for this reason. The Chinese central bank injected almost 12 billion euros into the banking system yesterday. But the real estate problem is not from yesterday. Evergrande has been in serious financial trouble for quite some time now. Beijing authorities realize that this is just the tip of the iceberg. It is expected that they will now tackle the real estate sector with a big broom to avoid a repeat of this scenario.