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China debt crunch

Evergrande remains on brink despite averting default

Beijing seeks to steady economy amid real estate turbulence and fear of contagion

Work has halted on the Evergrande Cultural Tourism City project in Suzhou, China.   © Reuters

SHANGHAI -- China Evergrande Group staved off default with a last-minute interest payment on a dollar bond, but the tough funding environment that brought on its crisis does not look set to improve anytime soon.

Evergrande's Hong Kong-listed shares jumped nearly 8% at one point Friday on reports that the developer had sent the $83.5 million payment to bond trustee Citibank on Thursday. The developer had missed the initial deadline last month, and the 30-day grace period was due to end Saturday.

Some observers see the Chinese government's fingerprints on the payment on dollar debt by a company that has been prioritizing domestic investors. Beijing is keen to avoid upheaval both in markets and in society more broadly.

Vice Premier Liu He had hinted Wednesday at action to resolve the problem, telling a financial forum that the government would "appropriately handle the risk of default by certain large companies."

State news agency Xinhua ran an editorial Thursday asserting that protecting the "bottom line" of financial stability is necessary for the "stable operation of the economy."

Chinese financial institutions may have provided Evergrande with capital. Zou Lan, head of the People's Bank of China's financial markets department, said last week that the central bank had told lenders in late September to continue "stable and orderly financing" to the real estate sector.

Conditions in the industry are rapidly deteriorating, which could have knock-on effects for the broader Chinese economy.

Developers are all but shut out of the dollar debt market. Just one such bond has been issued by a Chinese real estate company this month, according to Refinitiv.

Data from Chinese research firm Wind suggests that the credit crunch has spread to yuan debt as well. Developers' issuance of bonds in the Chinese currency, including commercial paper, between Oct. 1 and Friday sank 65% on the year to 8.3 billion yuan ($1.3 billion), with the number of floats down 62% to 11.

The rapid cooling of the housing market has eaten into another vital source of cash.

Sales of new homes between Oct. 1 and Oct. 17 fell by an annualized 14.5% compared with the same period in 2019, before the coronavirus pandemic, according to Nomura International. Existing-home sales in the same period tumbled 81.6%. Many would-be buyers are reluctant to sign contracts with developers at risk of default, or to invest in the market as they become conscious of sinking prices.

The debt repayment does not change Evergrande's precarious position. The grace period for a $47.5 million missed interest payment from September runs out next week, and a number of principal payments are coming due next year.

The company has booked 3.65 billion yuan in contracted sales since September, less than 1% of its year-to-date total, and making money from property sales will be even tougher going forward with work halted on many projects due to a lack of funding.

Evergrande founder Xu Jiayin said in an internal meeting that the company would "significantly scale back property development, and complete our pivot from real estate to new-energy vehicles within the next 10 years," Chinese media reported Friday.

A more radical asset and debt restructuring will be needed to settle the problem of its 1.97 trillion yuan, or more than $300 billion, mountain of liabilities.

"The Chinese government will probably take the time needed to engineer a soft landing," said an attorney with expertise in corporate restructurings.

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