Commentary on Political Economy

Sunday 26 September 2021

 Chinese cities seize Evergrande presales to block potential misuse of funds

State intervention gathers pace as second bond deadline looms for indebted property developer

Surveillance cameras are seen near Everrgande’s headquarters in Shenzhen

One district asked for presale revenue from a stalled residential development to be moved so that ‘homebuyers’ interest can be protected and project construction continues’ © Aly Song/Reuters


September 26, 2021 11:42 am by Sun Yu in Beijing

At least two local governments in China have taken control of sales revenue from Evergrande properties, even as Beijing remained silent about the unfolding liquidity crisis at the world’s most indebted developer and investors braced for more missed bond payments

In a circular issued on Wednesday and seen by the Financial Times, the Nansha District housing and urban-rural construction bureau in the southern city of Guangzhou asked an Evergrande subsidiary to put presale revenue from Sunshine Peninsula, a stalled residential development, into a state-controlled custodial account so that “homebuyers’ interest can be protected and project construction continues”.

Another district housing bureau in Zhuhai, a southern city neighbouring Macau, asked an Evergrande residential project this month to transfer sale proceeds into a government account, according to people with knowledge of the matter.

The moves marked an escalating effort to curb the impact of Evergrande’s debt crisis, which rocked global financial markets last week and has sparked protests from suppliers and investors, who fear they will not be repaid in the event of a default. The developer has struggled to access credit in the wake of Beijing’s crackdown on spiralling property sector leverage amid a post-pandemic housing bubble.

Fears of wider contagion deepened after investors in an Evergrande offshore bond did not receive an interest payment ahead of a closely watched deadline last week.

Evergrande, which has not made a statement on the $83.5m coupon, has a 30-day grace period before triggering a default.

As many as eight other provinces have made requests since August for Evergrande to place presales revenue into custodial accounts as the cash-strapped developer put hundreds of unfinished projects on hold, according to Caixin, a Chinese financial magazine.

“It is common for Chinese developers to allocate sales proceeds earmarked for particular projects for other uses, ranging from debt payments to land purchases,” said Bo Zhuang, a Singapore-based economist at Loomis Sayles, an asset manager. “That is no longer an option,” he added.

Evergrande did not respond to a request for comment on Sunday. 

The project delays and construction suspensions clouded expectations of what could become China’s biggest-ever corporate debt restructuring. Evergrande faces a total of Rmb1.97tn ($305bn) of liabilities, including $20bn of outstanding debt on offshore markets.

As of earlier this month, progress had stalled at hundreds of Evergrande’s ongoing projects across China, most of which have been fully sold, according to people close to the company. The suspended developments have prompted a flood of online complaints as well as public protests by anxious homebuyers and retail investors.

“I have spent my life savings on the apartment,” said a Guangzhou resident surnamed Zhu who bought a two-bedroom flat at Sunshine Peninsula for Rmb2.1m ($325,000). “My life will be ruined if the project can’t be finished.”

Zhu added that his payments for the apartment did not appear on the account earmarked for the project. “I have no idea where the money has gone,” he said.

Beijing has made project completion a top priority in tackling the Evergrande debacle, indicating authorities’ concern that public dissatisfaction with the company could threaten social stability, a chief concern for China’s leadership.

This has prompted local authorities to put the developer’s presale proceeds under their watch so that project funding would not go elsewhere.

“There is no way our headquarters can transfer the money now that it is in a government account,” said an official at Sunshine Peninsula, which is expected to resume construction following a five-month suspension.

But how much the government interventions will kickstart stalled projects where sales proceeds had already been reallocated remains an open question.


Evergrande’s plight brings no joy to the man behind its big short

The financial woes have rippled across the sprawling group: in a regulatory filing on Friday, Evergrande New Energy, its electric vehicles unit, warned that it was facing a “serious shortage of funds” and would be forced to suspend operations and possibly employees’ salaries without “further capital injection”.

One Evergrande executive noted that local governments were also providing policy incentives, such as greenlighting property sales on projects that failed to pass zoning requirements, to help improve Evergrande’s cash flow.

The developer faces more upcoming deadlines, including a $45m payment due on Wednesday on a bond maturing in 2024.

“The idea is to employ whatever policy tools to help us sell faster within the existing legal framework,” said the executive.

Still, the measures would not fully bridge the funding gap needed to complete the projects, the executive added.

“We simply don’t have enough resources to complete all the projects on time. We need more external assistance.”

Additional reporting by Edward White in Seoul

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