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China debt crunch

China Evergrande warns of default risk if it fails to sell assets

Total liabilities rise despite developer's efforts to pare back debts

Evergrande NEV has unveiled nine models and spent billions of dollars but has yet to sell any cars.    © Reuters

HONG KONG -- China Evergrande Group has warned for the first time that it may fail to repay its debts unless it is able to attract new investors and sell assets.

The world's most indebted property developer said on Tuesday in its first-half results statement that its total liabilities reached 1.97 trillion yuan ($304.45 billion) as of June 30, up from 1.95 trillion yuan on Dec. 31.

While interest-bearing borrowings declined by a fifth to 571.8 billion yuan, the lowest level seen in five years, amounts due to suppliers and other trade payables climbed almost 15% to 951.13 billion yuan.

Though it skipped its usual briefing for reporters on its results, Evergrande said in its stock exchange statement that it would shore up its finances by selling additional shares in its Hong Kong-listed electric vehicle and property services units as well as other assets, rolling over loans, boosting property sales and clamping down on costs.

"In the event that the group fails to implement the above measures, maintain existing financing and/or obtain necessary new financing as planned, its liquidity issues may deteriorate, which may result in defaults on borrowings and litigations that may have a material adverse effect on the group," Evergrande said.

The caution contrasts with Chairman Xu Jiayin's insistence early last year that investors "relax" and take assurance the group would meet its debt payments when market worries caused a slump in Evergrande bonds.

The bonds have fallen much further since. One due in June 2025 was trading at 36.3 cents per dollar of face value on Tuesday, according to Refinitiv.

Evergrande stock, which has fallen 69.2% so far this year, dipped 0.7% on Tuesday to HK$4.36 before the earnings release. 

Evergrande reported that first-half net profits fell 29% from a year before to 10.5 billion yuan in line with a warning to investors last week. Government restrictions on the property sector imposed last year restrict developers as indebted as Evergrande from taking out new loans. 

The company said on Tuesday that its ongoing liquidity squeeze had "led to delays in payments to suppliers and of construction fees in the group's property development business, which resulted in the suspension of work on certain projects." It is in negotiations to restart work on those, it said.

As of June 30, Evergrande's bank deposits stood at 161.6 billion yuan, but its use of 74.86 billion yuan of that was "restricted."

Evergrande is a bellwether for China's leveraged property sector, closely tracked by regulators, investors and rating agencies concerned about the potential for contagion should the company default on loans from banks and trusts.

The People's Bank of China and the China Banking and Regulatory Commission summoned company executives this month, directing them to reduce debt and refrain from spreading misleading information.

Between March and December 2020, Evergrande raised almost $11.5 billion by selling equity as well as stakes in various subsidiaries.

Earlier this month, it sold 1 billion yuan of its holdings in regional lender Shengjing Bank to municipal agencies and agreed to sell a stake in internet company HengTen Networks for $418 million, less than two months after offloading another $570 million stake. It also revealed this month that it had held unsuccessful talks about selling a stake in China Evergrande New Energy Vehicle Group to smartphone maker Xiaomi.

On Monday, Evergrande NEV said it may have to delay its launch of production unless it can find more capital. Its shares have slumped 92% since peaking in February.

The company has spent tens of billions of dollars on acquisitions, research and building factories over the past three years, with the announced goal of becoming the "world's largest and most powerful" new energy vehicle group within three to five years. While it has unveiled a number of vehicle models, Evergrande has yet to bring any to market.

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