Rating agencies, citing default risk, have further downgraded China’s housing giant Evergrande after the company disclosed the extent of its financial problems. Experts have warned of impacts on the country’s broader property industry and banks.
Rating agency S&P further downgraded Evergrande to “CC” from “CCC,” with a negative outlook on Sept. 15, citing reduced liquidity and default risks including the possibility of debt restructuring.
The downgrade comes two days after Evergrande released a statement saying that growing speculations about its impending bankruptcy “are completely untrue,” although it has “indeed encountered unprecedented difficulties at present.”
Another rating agency, Fitch, published comments on Sept. 14 that the company’s default could expose numerous sectors to heightened credit risk. However, the overall impact on the banking sector would be manageable, it said. Fitch downgraded the company’s rating to “CC” from “CCC+” on Sept. 7.
On Sept. 14, the highly indebted property group admitted in a statement to the Hong Kong Stock Exchange that its cashflow was under “tremendous pressure.”
It has not been able to sell its properties and assets, including its Hong Kong office building and parts of stakes in its electric vehicle and property services businesses, soon enough to meet its crippling debt.
Evergrande reported 1.97 trillion yuan ($305 billion) in liability at the end of June, according to the draft of its first half-year report. This includes 572 billion yuan ($88.8 billion) in bank loans and other borrowings from the bank market.
The property giant blamed “ongoing negative media reports” for damaging sales in September. Evergrande’s sales had already halved from June to August, imposing “tremendous pressure on the group’s cashflow and liquidity.”
The company disclosed that two of its subsidiaries had failed to uphold guarantee obligations for 934 million yuan ($145 million) worth of wealth management products issued by third parties.
Frank Tian Xie, professor of business at the University of South Carolina Aiken, said the debt crisis and suspension of repayment to investors suggested that Evergrande is facing defaulting and insolvency.
“[Banks] have rights to auction its assets based on their contracts if it defaults, then Evergrande and its subsidiaries would go bankrupt and sell off properties,” Xie said.
He told The Epoch Times the bankruptcy of Evergrande would have knock-on effects for many banks and developers. Xie suggested it could pose a widespread threat to the country’s debt-laden property sector, or even the financial system.
He added that the debt is now causing difficulty for the Chinese regime. Even if authorities bailing out one of the country’s largest real estate developers, Evergrande’s troubles could unleash a domino effect on other sectors of China’s economy.
China’s National Bureau of Statistics said the impact on the country’s property sector is “under further observations” when asked about Evergrande’s liquidity crisis at Wednesday’s press conference.
Complaints have flooded Chinese social media platforms as property buyers worry their projects could remain unfinished, leaving them without their pre-paid new homes. Investors have also called for their money back.
Since Sept. 12, angry investors have been protesting at the company’s headquarters in Shenzhen, demanding repayment of loans and financial products. Although security guards and police dispersed the crowds, roughly 40 protesters still appeared at the entrance on Wednesday.
Reuters and Luo Ya contributed to this report.
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