Shares in China’s biggest property developer yesterday surged after it reached an agreement with key investors that helps it avoid a cash crunch that some observers fear could hit the global financial system.
The future of China Evergrande Group (恒大集團) has been thrown into doubt as it struggles to cover repayments on debts totaling more than US$120 billion, with a letter last week circulating on Chinese social media appearing to show it asking the government in Guangdong for help.
The company, the world’s most indebted developer, refuted the claims on Thursday last week, saying that they were “fabricated” and “pure defamation,” and that it would take legal action.
Its shares plunged by one-fifth in Hong Kong, while its Shanghai-listed stock was suspended and ratings group S&P downgraded its credit outlook to “negative.”
Analysts have said that a default on huge debts owed by the company, founded by billionaire Xu Jiayin (許家印), a key player in China’s building boom, could send bad loans cascading through the country’s opaque banking system.
However, the firm on Tuesday moved to stabilize its affairs after key investors agreed not to sell 86.3 billion yuan (US$12.67 billion) in Hengda Real Estate Group Co (恆大地產集團), an Evergrande unit.
The company had raised billions of dollars by selling stakes in the unit, and pledged to repay the cash if it did not float by January.
There had been fears they would push to get their money, but the developer said in a statement that the investors “will continue to hold their interests in Hengda Real Estate, with their percentage of equity interests remaining unchanged.”
Tuesday’s deal, which also starts the process of shoring up a further 28 billion yuan of shareholdings, buys some time for the developer to sort out its debt repayments.
Evergrande shares yesterday jumped almost 15 percent in Hong Kong. That followed a more than 20 percent jump on Monday after the firm sought to reassure investors about its future.
Yesterday’s rally was also helped by news that Evergrande had filed to spin off its property services business in Hong Kong, helping to raise much-needed cash.
The developer owes US$88 billion to banks and other lenders inside China, and has borrowed a further US$35 billion from bondholders around the world, according to Bloomberg.
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