September 27, 2021

COMMUNIST CHINA: Evergrande Chairman Hui Ka Yan Has Been Paid $8 Billion In Cash While Property Developer Piled On Debt. Evergrande Worries Help Fuel Selloff At Chinese Developer Sunac. Wow. 😱
written by Hank Tucker
Thursday September 23, 2021

Amid the chaos surrounding concerns about debt payments by China’s property developer Evergrande Group, it’s good to be the chairman.

Although Evergrande Group’s 80% stock decline so far this year has made a dent in its billionaire founder and chairman’s fortune, Hui Ka Yan will remain extraordinarily wealthy even if the company collapses under the weight of its more than $300 billion in debt and a looming series of bond payments that has rattled the global economy this week.

Of Hui’s current estimated $11.5 billion fortune, Forbes calculated that $8 billion is from cash dividends paid to Hui since Evergrande’s 2009 IPO on the Hong Kong Stock Exchange. The real estate developer’s total liabilities have increased every year since it went public, according to its annual reports, but it has paid out a dividend every year except 2016.

The dividends have gone primarily into the pocket of one man—Hui owns 10.2 billion shares of Evergrande, a 77% stake in the company. Evergrande paid dividends of 1.13 yuan per share ($0.17) for the year 2017 and 1.419 yuan per share ($0.22) for 2018, resulting in more than $4 billion in income for Hui for those two years alone. (Dividends in Hong Kong are not taxed.) During that span, Evergrande’s debt rose from $179 billion to $243 billion. At the end of 2020, Evergrande had $302 billion (1.95 trillion yuan) in liabilities, up from $7.7 billion (49.9 billion yuan) in 2009 when the company went public.
“The onus is more on the lenders. If the lenders are aware of the fact that the use of the proceeds is to fund a dividend, they have to be more careful,” says corporate finance consultant Robert Willens. “Frequently in cases like this, a lender will ask for a guarantee on the part of the principal shareholder. That would not be surprising to find that there was some sort of arrangement where the shareholder would be on the hook.”

Founded 25 years ago in Guangzhou, Evergrande has become China’s second-largest property developer by sales under Hui’s leadership, behind Country Garden Holdings, but concerns about its ballooning debt and its inability to make interest payments have led to its stock declining sharply this year. Evergrande pushed China’s housing market to the brink of disaster last week when it warned banks it would be unable to make its debt payments due this month. The developer still owes an estimated 1.6 million unfinished apartments to buyers who have already made down payments.

“Whether Hui Ka Yan remains in place or not is very hard for me to say. I think that Evergrande will have to sell off its non-core assets and will have to give a lot of its developments to domestic developers,” says Anne Stevenson-Yang, cofounder of New York-based J Capital Research and an expert on the Chinese market. “What does that mean for the domestic debt for people who have bought wealth management products or apartments or lent money to Evergrande or done construction for Evergrande or any of that? That's not something that's going to be bailed out.”

Hui, now 63, grew up poor and studied at Wuhan University of Science and Technology. He worked as a technician in a steel factory for a decade starting in 1982, then launched Evergrande by buying low-priced properties. His fortune peaked at $36.2 billion on Forbes’ 2019 World’s Billionaires list and was still at $27.7 billion as of March 5 on this year’s list, making him the 53rd-richest person in the world.

The value of his shares has since crashed from more than $20 billion to $3.5 billion, but even if it goes to zero, his dividends alone would still make him one of the 100 richest people in China— and richer than the likes of U.S. billionaires like Epic Games cofounder and CEO Tim Sweeney and hedge fund tycoon David Shaw. Meanwhile, the New York Times reported that Evergrande solicited loans from tens of thousands of employees to raise money earlier this year, withholding their bonuses if they refused.

A spokesperson for Evergrande did not reply to a request for comment on the dividend payouts to Hui.
Wall Street Journal
written by Xie Yu
Monday September 27, 2021

The shares and bonds of another major Chinese property developer have dropped sharply, as investors fretted that the company could run into similar troubles as China Evergrande Group. EGRNF 6.60%🟢

Investors sold down securities from Sunac China Holdings Ltd. 1918 -9.37%🔻 over two trading sessions, after a document circulated online showing a Sunac unit asking for government help to ease its liquidity difficulties.

Sunac’s Hong Kong-listed shares fell 9.4% Monday to close at their lowest in more than four years, building on a near-7% decline in the previous trading session.

Its U.S.-dollar-denominated bonds also retreated, with 7% bonds due in July 2025 quoted at about 81 cents on the dollar by late afternoon Monday in Hong Kong, according to Tradeweb. This debt was quoted above 98 cents on the dollar at the start of the month, and as recently as July Sunac was able to raise $500 million of new debt funding from bond investors.

The document, seen by The Wall Street Journal, asked for help from the government in Shaoxing, a city in the eastern province of Zhejiang. It said the local property market had cooled to a freezing point, with home buyers losing their appetite as authorities had imposed curbs on prices, sales and resales, and had slowed their approval of home sales and mortgages.

The document was a draft prepared by a Sunac subsidiary that had yet to be submitted to the government, a person familiar with the matter said. It was prompted by slow official approval of contracts signed by the company and home buyers, which had reduced the cash flow of the Shaoxing company, this person added.

Likewise, Nomura credit analyst Iris Chen wrote in a note to clients that Sunac’s investor-relations team had quickly clarified that it was only an internal draft.

Sunac has double-B credit ratings, toward the top of the “junk” scale, reflecting considerably stronger finances than Evergrande and some of the country’s other highly indebted developers. The two-day selloff underscored how fragile market sentiment had become due to Evergrande’s difficulties and to Beijing’s tough stance on the real-estate market, analysts said.

“Sunac faces difficulties like many of its peers, but the profile is rather resilient. It has been deleveraging for the past two years, aligning with the regulatory direction,” said Chuanyi Zhou, a credit analyst at research firm Lucror Analytics.

It wasn’t surprising to see the risks around Sunac being overblown by investors, Ms. Zhou added, “because the market is very sensitive after the Evergrande woes.”

Last fall, Evergrande’s shares and bonds similarly tumbled after a document circulating online appeared to show its flagship onshore subsidiary pleading with authorities for support. Evergrande said the document was fabricated.

Late Monday in Hong Kong, Sunac said it had bought back and would cancel some bonds due in 2024 with a face value of $33.6 million.

Analysts from debt research firm CreditSights, however, said in a report Monday that they were skeptical about Sunac’s deleveraging. They said by increasing liabilities such as trade payables, the company had been able to simultaneously cut debt and bid aggressively for land.

Analysts say that as debt funding has gotten harder, several Chinese property companies have in effect borrowed more from suppliers, customers or business partners instead.

The news about Sunac’s subsidiary was negative, and the whole sector is likely to suffer from falling presales of unfinished apartments in September, as Evergrande’s troubles prompt buyers to hold off, Ms. Chen at Nomura wrote.

Still, she said Sunac wasn’t a near-term default candidate and its liquidity looked manageable, since it held unrestricted cash of 1.1 times its short-term debt as of mid-2021. Unrestricted cash is money that a business can deploy as it chooses, including for debt repayments, while restricted cash is earmarked for particular purposes—for example, as collateral against a loan.
written by Noah Smith
Saturday September 25, 2021

The world is anxiously watching the Chinese housing market, in the wake of property developer China Evergrande Group’s potential default. Market watchers have been drawing comparisons to the U.S. crash in 2008, and some even to Japan’s property bust two decades earlier. But although there are some similarities, China’s situation is fundamentally different from either of those two episodes.

The most obvious comparison for a potential Chinese real estate crash is the U.S. housing bubble that burst after the fall of Lehman Brothers. By now, we know that land bubbles are especially pernicious since they involve so much debt. When they pop, they tend to take the financial system down with them, causing lenders to pull back out of fear of insolvency and illiquidity. That’s what happened to the U.S. But as commentators have been quick to point out, China is not really in danger of this kind of scenario, because the government controls the banks. If President Xi Jinping tells Chinese banks to continue to lend, they will do so, no matter what sort of toxic Evergrande-style sludge is on their balance sheets.

Japan’s bubble and crash in the early 1990s is an example that relatively few outside the country understand, but which many may instinctively associate with China because both countries are in East Asia.

In the late 1980s, Japan’s efforts to catch up to the West had come to full fruition, but its growth was correspondingly slowing. In an effort to sustain the growth they were accustomed to, Japanese banks got into real estate finance in a big way, helped by deregulation, low interest rates and a strong currency. So far, this sounds a bit like China. Every time China’s economy is in danger of slowing, it commands banks to lend, and they mostly lend to real estate and associated industries like construction. This is a more deliberate version of what Japan did, but the impetus to sustain rapid growth is probably similar.

Another factor that helped pump up Japan’s bubble was its financial system. Unlike in the U.S., most companies borrowed from big banks instead of issuing bonds. To get loans, companies needed collateral, and the collateral banks were most eager to accept was land. That increased the demand for urban real estate, pumping up the price bubble, but it also exacerbated the collapse on the way down; when companies’ collateral depreciated, banks wouldn’t lend to them anymore, forcing them to curb operations.

Again, this is unlikely to be a problem for China. Chinese companies certainly have a ton of debt, but if real estate isn’t part of their core business, it probably doesn’t matter for bank lending if their land holdings depreciate; the government can still just direct loans their way if it wants. Companies that depend on real estate or construction — and local governments that finance themselves with land sales — will certainly take a huge hit if the property sector goes down, but manufacturers and other companies will likely be safe, unlike in Japan.

So that’s the good news. Basically, both the U.S. and Japan had capitalistic financial systems where lenders could and did pull back when real estate crashed; China has no such vulnerability.

But in every respect except financial stability, China’s economy is more vulnerable to a real estate crash than either America’s or Japan’s was. Real estate and related industries account for almost 30% of China’s GDP — a far higher share than the U.S. at the height of its boom. If Xi is really serious about shifting the Chinese economy away from real estate and toward manufacturing, as he has declared, it will be a painful adjustment. If he uses Evergrande’s fall and a resultant real estate crash as the occasion to make that structural shift, the pain will be even greater because it will be concentrated in a short amount of time.

To make matters worse, Chinese citizens are extraordinarily dependent on real estate for their nest eggs — the homeownership rate is 90%, and it’s estimated that urban Chinese people have more than 70% of their net worth in property. This is something Japan didn’t have to deal with; Japanese houses tend to depreciate rather than appreciate, because the government scraps and rebuilds them every so often. So at least when land prices crashed, the middle class wasn’t wiped out. The U.S. middle class took a larger hit, but if China’s land prices go down, the financial carnage among the general populace will be of epic proportions.

Finally, a long-lasting bust in real estate would greatly lessen China’s ability to respond to macroeconomic shocks. Japan and the U.S. use traditional monetary and fiscal policy to fight recessions, but China has always relied on the expedient of ordering banks to lend. Without real estate, there will be far fewer profitable enterprises for Chinese banks to lend to, meaning China will be vulnerable to the next recessionary shock that comes along.

So China’s real estate situation is fairly different from that of the U.S. and Japan in their housing crashes, but in many ways it’s worse. No, it doesn’t have the financial fragility of a capitalist country, but its middle-class wealth, stabilization policy, and long-term growth are more dependent on real estate. Any company invested in China, or who makes a living exporting to China, should be very nervous about the potential fallout from Evergrande.

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