There are growing signs the Evergrande fiasco has claimed a new victim, with China’s biggest builder now engulfed by the crisis.
There has been one major concern on the minds of experts ever since Evergrande’s slow downfall began – contagion.
And now, there’s one of the clearest signs yet that major fear is fast becoming a reality.
The Chinese property juggernaut has been teetering on the brink of collapse for months now, after the firm managed to rack up staggering debts of $A408 billion, cementing its status as the world’s most indebted real estate developer.
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The company’s debt crisis was so significant that insiders immediately began to speculate whether it would spread to other companies and industries, via a so-called “contagion” effect.
As the saga unfolded, a string of other Chinese developers have run into trouble, doing little to ease the panic surrounding the Evergrande fiasco.
But now, it has reached a new low, with China’s biggest builder, Country Garden Holdings Co, now enveloped by the crisis.
‘Bellwether for contagion risk’
After escaping the financial crunch of other businesses such as Shimao Group Holdings Ltd, Kaisa, Sunshine 100 China Holdings Ltd, Fantasia and Sinic Holdings, Country Garden’s shares and bonds have finally taken a major hit.
It was in response to a report the company had now managed to secure investor support for a potential debt deal, which saw its dollar notes fall to record lows.
The report was seen by many as a sign that confidence in the company was plummeting.
It’s a big deal because, according to Bloomberg’s Alice Huang and Rebecca Choong Wilkins, it is “viewed as a bellwether for contagion risk, as unprecedented levels of stress in the offshore credit market threaten to drag good credits down with bad”.
“Any sign of doubt in the firm’s capacity to weather liquidity stress risks may prompt a widespread repricing of other higher-quality developers,” they explained, noting Country Garden had more than 3000 projects across China.
“If the firm starts showing signs of stress, it will severely damage already fragile investor and homebuyer confidence, posing threats to China’s economy and even social stability,” the report continues.
Evergrande avoids disaster
The news comes just days after Evergrande managed to avoid its first public default, after securing investor support to delay repayments on a multimillion-dollar onshore bond.
It highlighted a bizarre discrepancy in the situation, because while international rating companies have listed Evergrande as being in default, it has a far higher credit rating locally, despite seeking government assistance and entering a debt-restructuring phase.
“For many developers, defaulting on their onshore bonds may have a far greater impact on the company than defaulting offshore,” said Frank Zheng, head of international fixed income at China Asset Management Co, told The Wall Street Journal.
‘Illegal’ apartments to be demolished
The latest development also follows local media reports from early January that the company would be forced to demolish 39 luxury apartment buildings in a development in Hainan within 10 days after they were deemed to be “illegal”.
Chinese media reported that a document issued by the Danzhou government on December 30 claimed the buildings – part of the Ocean Flower Island project – would have to be knocked down after an illegally obtained permit for the construction of the buildings had been revoked.
It is understood the apartments are worth an estimated 7.7 billion yuan ($A1.7 billion).
Soon after the news broke, Evergrande made headlines after unexpectedly announcing its shares would be suspended from trading.
No explanation for the halt was given by the firm – but once trading resumed, Evergrande stunned market watchers by making a surprising resurgence, with shares jumping a whopping 3.1 per cent – to $HK1.64 ($A0.29) – in the wake of the pause.