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China central bank rebukes Evergrande, says ‘poor management’ led to crisis

Hamartia Antidote

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  • China’s central bank says property developer Evergrande Group failed to act judiciously in the face of changing market conditions
  • But it stressed China’s property sector is healthy overall and any ‘spillover to the financial industry is controllable’

China’s central bank for the first time on Friday lambasted property giant Evergrande Group for its “poor management”, while saying the potential spillover effects to the financial system from a collapse of the developer are controllable.
The comments from Zou Lan, head of the financial department at the People’s Bank of China (PBOC), come amid heightened market concern about worsening debt problems in China’s property market, which has for decades been a main engine of growth in the world’s No 2 economy.

Fears about a fast-spreading contagion in the US$5 trillion property sector have sparked a sell off of bonds from Chinese developers, while US Secretary of State Antony Blinken said earlier this month that China must “act responsibly” in addressing the potential economic impacts of Evergrande’s demise.
China’s financial regulators under the watch of the central bank are drawing a distance from Evergrande, after a high-profile crackdown on the nation’s most profligate leveraged asset buyers in 2017, including Anbang Group, Dalian Wanda Group and HNA Group, but which mostly left Evergrande off the hook except for a rap on the knuckles for its wealth management unit.

It had poor management in recent years. It failed to run its businesses cautiously according to changes in market conditions, but expanded blindly Zou Lan


As the developer built up most of its borrowings over the past five years, the financial regulators are being asked how Evergrande came to amass almost the equivalent of 2 per cent of the entire nation’s debt.


“It had poor management in recent years. It failed to run its businesses cautiously according to changes in market conditions, but expanded blindly,” Zou said at a media briefing in Beijing. “This led to the deterioration of operational and financial indicators and eventually broke into a crisis.”


However, he said the plight of Evergrande was an exception in China’s property market, which was healthy overall.

“Evergrande’s financial liabilities are less than one third [of its total business], while its creditors are scattered,” Zou said. “Exposure for individual banks is small. Overall, the risk of spillover to the financial industry is controllable.”

The Shenzhen-based company, which is China’s largest developer in terms of 2020 sales revenue, tapped bond markets to raise hundreds of billions of yuan in bank loans as it sought to expand its core residential housing business and diversify its business into areas as varied as new energy vehicle production and a soccer team ownership.

Property developments account for about 60 per cent of its business, government data showed.

“We are urging the acceleration of asset disposal and resumption of construction … Financial authorities will cooperate with urban planning agencies and local governments to provide financing support to restart construction,” Zou said.
Though the government has not revealed overall bank exposure to the troubled developer, the firm has reported 1.95 trillion yuan (US$302.8 billion) of liabilities.

More than a dozen medium-sized banks disclosed their business connections to worried investors last month, with regional lender Zheshang Bank, for instance, reporting exposure of 3.8 billion yuan.

China Construction Bank, the country’s second largest lender, said on Friday its exposure to Evergrande is relatively small and guaranteed against collateral.

The central bank and the banking regulator – the China Banking and Insurance Regulatory Commission (CBIRC) – summoned Evergrande executives in August, asking them to “keep its operations stable, actively solve debt risks and safeguard the stability of property market and finance”.

Fearful of a housing bubble, Beijing has imposed property curbs in an attempt to cool the country’s real estate market. Money supply and bank lending data for September has begun to indicate weaker credit demand, with medium and long-term household borrowing – widely used as proxy for mortgage loans – at 466.7 trillion yuan, a fall of 169.5 billion yuan from a year earlier.

Zou said mortgage restrictions were occurring in “a few cities” because of fast price hikes, but the situation would return to normal when the property market stabilised.

He acknowledged the relatively big decline in property sector loan growth, calling it a knee-jerk reaction comparable to the interbank rate hike immediately after the takeover of Baoshang Bank in 2019.

However, Zou said some banks still misunderstood the PBOC’s much-vaunted “three red lines” – financial requirements that decide whether developers can borrow – and that had led to liquidity stress for some developers.

“The central bank and the CBIRC convened a meeting at the end of September, asking major banks to accurately implement the government rules to keep orderly lending to the property sector and safeguard its stable development,” he said.

On Friday, the Central Commission for Discipline Inspection kicked off a two-month-long inspection of financial lenders and ordered them to better meet the financing demands of the masses and real economy, while preventing systemic financial risks.
Zou said the dumping of US dollar bonds issued by Chinese property developers was a “natural response” from investors, and were seen previously in the case of China Huarong Asset Management Company, the state-owned distressed debt manager.

“Take Huarong for example, market sentiment is recovering after strategic investors were introduced in August,” he said.

“We now urge issuers to strictly abide by market rules, appropriately handle their debt and actively fulfil their obligations.”

China’s property sector, which accounted for about 7.3 per cent of gross domestic product last year, has long been regarded as the “biggest grey rhino risk” facing China’s financial system by regulators like Guo Shuqing, chairman of CBIRC.
In June, outstanding loans to property developers and for mortgages totalled 14.2 trillion yuan and 36.6 trillion yuan respectively, accounting for 7.4 per cent and 19.1 per cent of all bank loans.
 

patero

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Certainly PWC needs to explain itself.
They might be explaining themselves to a federal court. Evergrandes high yield bonds have tanked as well as the looming defaults on US denominated bonds, some angry US investors are going to be out of pocket and looking for answers.

PWC have been a party to Evergrandes balance sheet manipulation. Avoiding write downs by reclassifying apartments meant for resale as investments is a clear violation of GAAP. Other property developers in China are likely to be exposed for similar practices, some of whom have probably used PWCs audit services.
 

cloud4000

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They might be explaining themselves to a federal court. Evergrandes high yield bonds have tanked as well as the looming defaults on US denominated bonds, some angry US investors are going to be out of pocket and looking for answers.

PWC have been a party to Evergrandes balance sheet manipulation. Avoiding write downs by reclassifying apartments meant for resale as investments is a clear violation of GAAP. Other property developers in China are likely to be exposed for similar practices, some of whom have probably used PWCs audit services.
Sounds like the replay of Enron, where the auditing firm, Arthur Andersen, give it a clean chit and said all of its transactions were above board, only to find out they were not, which eventually led Enron into bankruptcy. The incident destroyed Arthur Andersen, which, at the time, was the world's largest accounting firm.
 

patero

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Sounds like the replay of Enron, where the auditing firm, Arthur Andersen, give it a clean chit and said all of its transactions were above board, only to find out they were not, which eventually led Enron into bankruptcy. The incident destroyed Arthur Andersen, which, at the time, was the world's largest accounting firm.
Yeah I was thinking the same regarding Enron. This is going to get worse for PWC given the likelihood of more exposure to audit discrepancies in the Chinese property sector, especially those listed in HK.
 

patero

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Are we looking towards big 3 instead of big 4

Can this scandal damage PWC to that extent?
It will damage their global brand and they may be liable to some extent under federal law, but they will avoid the full wrath of US regulators and lawmakers because it's Evergrande audits were made in Hong Kong.
 

S10

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I said from the beginning that CCP has no interest in bailing out Evergrande, but people didn't believe it. After Big Tech, real estate developers are next on the government's chopping block for inflating property prices.
 

Menthol

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Restructure is actually leads to a better company.

I wonder who bought AIG share during the troubled time in 2008?

Today you will be rich.
 

patero

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Restructure is actually leads to a better company.

I wonder who bought AIG share during the troubled time in 2008?

Today you will be rich.
Very different companies, Evergrande is an asset based company, and restructure for such a company never ends well. There won't be any residual value, it is too highly leveraged and most of what could be liquidated has been already. Some unfinished projects have already been absorbed by local governments, most of what's left on the books are incomplete for good reasons. That goes to the heart of Evergrandes problems, a sustained period of malinvestment in projects with less value than their cost. Essentially a Ponzi scheme with new investment used to finance old projects, and like any Ponzi scheme when the pipeline of new investment is turned off (three red lines) collapse is inevitable.

Xia Haijun cashed out much of his shareholding over the last year, probably saw the writing on the wall when the three red lines policy was implemented. But there won't be any way for Evergrange to trade its way out of debt, the CCP has been very deliberate in its crackdown on property speculation. They are trying a controlled demolition of Evergrande and sending a warning to other developers. But the cooling of the property market now marks the beginning of a long period of stagnation and probable decline in China's property sector much like Japan's in the 90's.

The CCP will be aiming to ring fence the property market to prevent contagion into the banking and finance sectors and beyond, to this end they already injecting billions of yuan everyday to maintain liquidity. How long they keep this up is unclear.
 

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