Household risks grow as Evergrande unravels

Finance | Bloomberg and Victor Zhong 28 Sep 2021

Tens of thousands of Chinese households risk being sucked into the spectacular unraveling of China Evergrande Group after the embattled developer missed payments on investment funds sold through shadow banks, which have funneled many billions of yuan into its construction projects.

Some of the people linked to these lenders, known as trusts, have already dipped into their own pockets to repay wealthy investors on Evergrande's behalf, according to sources. Others are negotiating payment extensions with Evergrande.

It is not clear how much of the funds are in arrears, and there is no evidence that trusts are passing payment delays on to customers who bought fixed-income products tied to Evergrande.

Already, missed payments on wealth products worth some 40 billion yuan (HK$48.1 billion) sold by Evergrande itself to retail investors have sparked nationwide protests, putting more pressure on Beijing to find a solution and avoid further unrest.

Contagion into the US$3 trillion (HK$23.3 trillion) trust industry will put at risk many more investors, while also threatening the biggest source of non-bank funding for the property sector as shadow banks retreat.

Cash-strapped Evergrande faces repayments in the fourth quarter on US$1.8 billion of high-yield products sold through trusts to wealthy clients and institutions.

Another US$4 billion is due next year, according to data provider Use Trust.

Yet with more than US$300 billion in liabilities and cash flow shrinking, it is not clear how Hui can pull that off.

The company already missed a September 23 deadline to make a US$83.5 million coupon payment on a US$2 billion bond maturing in March.

The firm is also subject to heightened restrictions on its bank accounts as regulators ensure it uses cash to complete housing projects and not to pay creditors. The stock and bonds are reeling.

However, the debt-laden developer may have another asset to sell in its scramble to raise cash: its fast-growing life insurance business, said Bloomberg Intelligence analyst Steven Lam.

Lam said the developer's 50-percent stake in Evergrande Life Assurance may fetch US$600 million at 0.5 times book value. The insurer has boosted its market share more than nine-fold since the year after Evergrande's 2015 acquisition and has been profitable in each of the past four years.

This came as a China Evergrande's Guangzhou unit is set to sell 72 million shares of the Shenzhen-listed China Calxon Group at a 17-percent discount of the market price to cash in 196 million yuan.

In Hong Kong, the chief executive of Chinese Estates (0127), Kimbee Chan Hoi-wan, the wife of billionaire Joseph Lau Luen-hung, offloaded 435 million shares of Evergrande, collecting at least HK$987 million.

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