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Chinese language regulators meet with developer Evergrande as property audits enhance

A banner promoting the Emerald Bay residential project outside the China Evergrande Center in the Wan Chai area of ​​Hong Kong, China on Friday, July 23, 2021.

Lam Yik | Bloomberg | Getty Images

BEIJING – Chinese authorities urged indebted real estate giant Evergrande to eliminate its debt risks at a rare meeting with executives Thursday.

Hong Kong-listed China Evergrande Group has fallen more than 60% to a four-year low this year as investors worried about the developer's ability to repay its debt. The stock closed 1.6% lower on Friday, giving up initial gains.

The People & # 39; s Bank of China said in an online statement on Thursday that it, along with the China Banking and Insurance Regulatory Commission, had told Evergrande executives that they were following the central government's strategy for stable and healthy development of the Real estate market.

According to a CNBC translation of the Chinese text, Evergrande must "actively resolve" debt risks, support financial stability, and disclose true information in accordance with regulations.

The comments come days after Chinese President Xi Jinping said at a high-level economic policy meeting that the country must prevent major financial risks.

Evergrande confirmed the meeting with regulators in an online statement on Friday, saying it will comply with these specific requirements.

As one of the largest privately owned real estate groups in China, Evergrande is at the interface of Beijing's most important concerns: speculation in the real estate market, high levels of debt and the sustainability of an industry that accounts for more than a quarter of GDP.

Evergrande will have to settle more than 240 billion yuan ($ 37 billion) in bills and trade payables – such as materials – with contractors over the next 12 months, S&P Global Ratings announced earlier this month. By the end of December, about 100 billion yuan, or a little more than 40%, is due, S&P said.

The rating agency downgraded Evergrande and its subsidiaries from “B-” to “CCC” on August 5, as it was expected that “the conglomerate's risk of default will escalate due to increased asset freezes by various commercial parties, suggesting liquidity strains ".

"The negative outlook reflects Evergrande's increasingly tight liquidity and default risk. It also reflects our view that its plan to dispose of assets, although potentially substantial, lacks transparency or security," S&P said in a press release.

An analyst was unavailable Friday to comment on the meeting with regulators.

The Chinese authorities have tried to limit speculative activity in the real estate market, which, along with related industries such as construction, accounts for more than a quarter of China's GDP, Moody & # 39; s estimates in a report released in late July.

Beijing is particularly concerned about an accumulation of debt that is being used to promote real estate development. Over the past year, three “red lines” have emerged to limit the amount of debt real estate companies can hold relative to their assets.

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Recent developments around Evergrande reflect the authorities' focus on limiting risks in the property market with tighter regulation for the remainder of this year, said Bruce Pang, head of macro and strategy research at China Renaissance.

"A favorable regulatory environment and fine-tuning of policy containment are critical to determining whether Evergrande can smoothly weather its crisis," said Pang. “Investors will be closely following the potential deals for indications of how much leniency Evergrande has gained from Beijing (for real estate liquidity problems) amid a campaign to balance between containing financial risk and ensuring social stability balance."

The Chinese regulators' meeting with Evergrande is happening as Beijing accelerated regulation of various fast-growing industries – mostly technology – over the past year.

In early November, the central bank, banking, insurance and other departments met with Alibaba founder Jack Ma and executives at financial technology giant Ant Group. A few days later, Ant had to suspend its massive IPO and began a series of meetings with regulators that forced the company to reorganize as a financial holding company.

Previously, in recent years, Chinese authorities have stepped in to limit the debt-driven expansion of conglomerates like HNA airline and Anbang insurance company.

Increasing household debt

Reducing real estate market risks is even more important for China, as Moody & # 39; s estimates that 70 to 80% of the majority of private household wealth is tied up in real estate. The report added that around 10% of total household income is related to property.

While authorities have repeatedly insisted that "houses are there to live, not speculate," Chinese households' greater preference for investing in real estate than in stocks or other assets has contributed to rising real estate prices.

This, in turn, has led to a rise in Chinese household debt.

The home loan balance has only risen in recent years, reaching 36.6 trillion yuan at the end of June, according to official figures. The 13% year-over-year growth rate was slower than the 2020 14.5% rate.

The inability of the real estate market to meet individual housing needs has contributed to a rapid rise in household debt, said Liu Xiangdong, deputy director of the economic research division of the Beijing-based China Center for International Economic Exchanges.

He noted that China's property problems are linked to the problems of the education system. Parents who want to send their children to top schools have raised property prices nearby – something local authorities like the one in Beijing have tried to push back.

Residential property development remains a core business for Evergrande, but the company has risen to Fortune's Global 500 rankings and has expanded into industries such as film and entertainment, life insurance, and spring water. Evergrande supports the Guangzhou soccer team and has an electric car unit.

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