Evergrande files for US bankruptcy protection as China economic fears mount

HONG KONG/NEW YORK, Aug 18 (Reuters) – China Evergrande Group (3333.HK), a troubled developer, seeks U.S. bankruptcy protection, triggering concerns about China’s property crisis and its economic repercussions.

Amidst a worsening property crisis, Evergrande’s massive debt restructuring ranks among the world’s largest.

China recently slashed key interest rates and is set to cut prime loan rates, but experts believe more substantial actions are necessary to halt the economy’s downward trajectory.

Once a leading developer in China, Evergrande now symbolizes an unparalleled debt crisis within the nation’s property industry, constituting around 25% of the economy. This situation emerged following a liquidity crisis in mid-2021.

Evergrande has invoked protection under Chapter 15 of the U.S. bankruptcy code. This provision safeguards foreign companies undergoing restructuring from potential lawsuits or asset entanglements in the United States.

Viewed as a procedural move, this action signifies that Evergrande is approaching the conclusion of its restructuring endeavors, following over 18 months of discussions with creditors.

In a filing on Friday, Evergrande conveyed its intention to request U.S. court acknowledgment of the schemes of arrangement governing its offshore debt restructuring in Hong Kong and the British Virgin Islands. This step is taken as its dollar-denominated notes adhere to New York law.

In its filing, Evergrande clarified that the application is a standard procedure for offshore debt restructuring and does not encompass a bankruptcy petition. The company remains committed to advancing its offshore debt restructuring efforts.

The proposed date for the Chapter 15 recognition hearing is set for September 20.

Evergrande’s offshore debt restructuring encompasses a substantial sum of $31.7 billion, encompassing bonds, collateral, and repurchase obligations. It is set to engage with creditors later this month to discuss its restructuring proposal.

Since Evergrande’s challenges emerged, a series of Chinese property developers have defaulted on their offshore debt commitments, resulting in incomplete homes and unsettled suppliers. This has led to a decline in consumer confidence within the world’s second-largest economy. Property investment, sales, and new construction starts have been on a declining trend for over a year.

CASCADE EFFECT?

The property crisis has triggered concerns of a potential domino effect, raising fears of contagion risks spreading through the financial system. Such a scenario could further destabilize an already fragile economy, which is grappling with sluggish domestic and foreign demand, declining factory output, and a surge in unemployment.

Adding to the alarm, a prominent Chinese asset manager recently defaulted on repayments for certain investment products, highlighting a looming liquidity crisis. Meanwhile, Country Garden (2007.HK), China’s leading private developer, has now joined the chorus, signaling its own distress due to a tightening cash situation.

CONCERNED INVESTORS AND DIMINISHING GROWTH:
Investors in Zhongrong International Trust Co.’s trust products have expressed frustration and sought regulatory intervention after missed payments by the trust firm.

GROWTH FORECASTS DOWNGRADE:
Nomura and other major global brokerages have lowered China’s growth projection for 2023. Nomura now estimates a GDP growth of 4.6%, down from the previous 5.1%, with most of the growth likely occurring in Q1 post COVID-related restrictions.

CHALLENGES TO ACHIEVING TARGET:
China aims for 5% growth this year, but economists are increasingly warning of potential shortfalls unless significant support measures are implemented.

MARKET IMPACT AND INVESTOR SENTIMENT:
China’s economic and property challenges, coupled with limited stimulus efforts, have sent ripples through global markets. Asian shares have seen consecutive weekly declines, and Chinese and Hong Kong stock indices have experienced significant drops.

EFFORTS TO RESTORE CONFIDENCE:
China’s securities regulator has announced measures to reduce trading costs and encourage share buybacks in a bid to bolster investor confidence and revive the stock market.

CAUTIOUS OUTLOOK WITH A MEASURED RISK:
While acknowledging strain on the financial sector due to the economic downturn, analysts consider a full-fledged financial crisis to be a remote possibility, emphasizing that careful handling by officials is crucial.

PROPERTY POLICY ADJUSTMENTS:
China’s central bank has restated its commitment to fine-tuning and enhancing property policies, as indicated in its quarterly policy implementation report.

DEFAULTS AND DEVELOPER RESPONSES:
Since mid-2021, approximately 40% of Chinese home sales companies, mainly private property developers, have faced defaults. Longfor Group, the country’s second-largest private developer, aims to enhance profitability amidst changing supply and demand dynamics. The developer reported a modest 0.6% increase in first-half core profit, and it plans to achieve positive cash flow without incurring new interest-bearing debt this year.

CHALLENGING ENVIRONMENT:
The China property sector has faced significant challenges, with numerous developers affected since the Evergrande crisis two years ago. Some experts believe that the scale of the issue is substantial, making it difficult for the central government to introduce comprehensive measures.

GLOBAL COVERAGE:
Contributors to this report include Clare Jim in Hong Kong, Jonathan Stempel and Dietrich Knauth in New York, and Manya Saini in Bengaluru. The report was written by Sumeet Chatterjee and edited by Shri Navaratnam and Kim Coghil.

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