China Nears a Reckoning as Property Firms Face Tough Deadlines

China’s debt-loaded property market is headed for a reckoning, as China Evergrande Group and another troubled housing developer face deadlines for millions of dollars worth of payments in a test of Beijing’s narrative that it can handle the threat to the Chinese economy.

Evergrande, with bills totaling $300 billion or more, will need to come up with more than $82 million in cash by the end of Monday in the United States to fend off creditors. The developer said late last week that it was unable to make a separate payment worth $260 million, an indication investors took to mean the beginning of its eventual demise. Its shares tumbled by 20 percent on Monday in Asia.

The other developer in distress, Kaisa Group, must pay bondholders $400 million on Tuesday after it said it failed last week to get approval from investors to renegotiate the terms.

China’s property sector has kept global markets on edge for months, as developers have struggled to find cash to pay their soaring debts. They have been hampered by slowing demand from home buyers, falling property prices in many Chinese cities and Beijing’s crackdown on excessive bank lending.

Chinese property developers have $1.3 billion in U.S. dollar bond payments due this month. By April, that number will jump to $17 billion, according to an estimate by Goldman Sachs.

If Evergrande and Kaisa miss their payments, China’s leaders could find themselves in a difficult position. They risk destabilizing the property market and the financial system if big companies suddenly collapse. But if they step in to help, they could send a message that they will come to the rescue of property companies that built up mountains of dent.

The Kaisa Plaza in Guangzhou, China. In 2015, Kaisa Group was the first Chinese developer company to default.Credit…The New York Times

“The regulators are now between a rock and a hard place,” said Larry Hu, the chief China economist at the Macquarie Group

“If they blink, more excessive risk-taking will definitely come in the future,” he added. “If they don’t, the property downturn would inflict more pain on the economy.”

Chinese leaders have a broad array of tools at their disposal to stop a panic, including their tight grip on the banking and finance sectors, and their ability to silence shocking headlines in the news media. Still, the authorities are taking extra steps to stem the damage.

On Monday, Chinese banking regulators loosened the amount of money banks are required to stash away for a rainy day, giving them greater ability to lend amid the property woes and signs of a growth slowdown. The Communist Party’s Politburo on Monday said the government should “support the commercial housing market to better meet the reasonable housing needs of home buyers and promote the healthy development and virtuous cycle of the real estate industry.”

This weekend, officials in the southern province of Guangdong, where Evergrande is headquartered, sent a team of experts to the company to help it fix its finances. The authorities did not clarify whether they were prepared to intervene to keep it afloat.

The move came after Evergrande shocked both the market and regulators by disclosing late on Friday that it would no longer be able to fulfill its financial obligations and that it would begin discussions with its creditors over a plan to restructure its debt. The government then summoned Evergrande’s founder, Xu Jiayin, while regulators issued a flurry of statements to assure the market that the company’s woes would not spill over into the broader economy.

Chinese regulators blamed Evergrande’s management for its problems, while trying to persuade the public that the rest of the financial system was safe. The central bank pointed the finger at Evergrande’s “poor management and reckless expansion.” The banking and insurance regulator said it was concerned about recent developments but added that Evergrande’s problems would not have any “negative impact on the normal operations” of the finance industry. The securities regulator said the property sector as a whole remained “healthy” and pledged to support the “reasonable and normal financing” of developers.

A model of an Evergrande residential housing project at a showroom in the Chinese city of Dongguan in September. China’s central bank pointed a finger at Evergrande’s “poor management and reckless expansion.”Credit…Gilles Sabrié for The New York Times

By loosening lending while striking a strident tone against Evergrande, China’s leaders appear to be signaling that they are prepared to let the company fail but are taking steps to ensure that the broader economy is protected, said Tao Wang, chief China economist at the Swiss bank UBS.

“It seems that at least one question surrounding Evergrande has been answered — that the company is not ‘too big to fail,’ in terms of default,” Ms. Wang said.

Many of the problems in China’s property sector stem from government decisions to tame the reckless borrowing habits of China’s biggest real estate developers. Worried about a housing bubble, the central bank created “three red lines” last year: rules that forced property companies to get their debt levels down before seeking more money.

Evergrande’s financial troubles, which first emerged over the summer, have spilled over into the broader property market, making it harder for other developers to raise money. In September, the company alarmed global markets after it came close to defaulting on a U.S. dollar bond payment. Since then, Evergrande has made a series of 11th-hour payments on other bonds.

Cut off from bank financing, soon other property developers found the dollar bond market was also becoming harder to tap.

On paper, Evergrande has more than $300 billion of unpaid bills to bondholders, suppliers and others, while some analysts estimate it might have nearly that much off the books as well. New financial obligations have also begun to appear, like high-interest loan repayments that it owed to employees after strong-arming them into lending cash when it was in a tight spot earlier this year. And when Evergrande said last week that bondholders had demanded a $260 million payment, it was the first time the company had publicly acknowledged the obligation.

The Hong Kong stock exchange, where Evergrande’s shares have lost about four-fifths of their value so far this year.Credit…Jerome Favre/EPA, via Shutterstock

Evergrande may have additional hidden debts of more than $156 billion, according to one estimate from Goldman Sachs.

Several other property developers have defaulted on their debts, including Fantasia, a luxury real estate company that surprised the market because it had never missed a payment.

It is unclear how far Beijing will go to stop the risk of contagion in the broader industry. Kaisa, under pressure to make a final payment on its bond on Tuesday, is China’s largest borrower of overseas debt after Evergrande.

More developers have looming deadlines for payments. China Aoyuan Property Group, a smaller developer, said investors were demanding $651 million in bond payments.

To survive, Chinese property companies may need to find new sources of cash.

Fantasia on Monday offered a glimpse at how it hopes to cope. On its social media account, it published an interview with Pan Jun, the chairman, with the headline “Confront a person with the fear of death and they will fight to live.”

Mr. Pan described how the company bid for land earlier this year even as it wasn’t finding new capital. He also said that the company had not fully understood the significance of Beijing’s three red lines.

“The government already regulates and repeats the regulations over and over again,” Mr. Pan said. “But we don’t have a department to give us risk warnings.”

Now that the company had learned from its mistakes, he said, it would actively communicate with its bondholders and regulators every day.

Referring to the phenomenon of “lying flat,” in which some young Chinese people try to take it easy rather than follow an intense work life, Mr. Pan added, “we don’t lie flat.”

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