Beijing avoided taking direct action to save what was once seen as one of the nation’s “too big to fail” firms as developer China Evergrande Group tumbled from crisis to crisis over the past two years.

Some creditors, investors, and analysts are now counting on government stepping in to manage the repercussions as the world’s most indebted developer now stands at the edge after authorities opened a criminal probe into its wealthy founder.

With hundreds of thousands of unfinished homes scattered around the nation and about $300 billion in liabilities at home in China alone, the property giant’s ugly fall could wreck the already fragile economy.

“The (investigation into Hui) clearly shows that Chinese policymakers prioritise political considerations to economic ones in dealing with Evergrande,” he said.

“From a political perspective, the government needs to ensure the company and its owners paying a heavy price for causing China’s real estate crisis and facing due punishment. Any restructuring can only happen after this political responsibility being taken.”

According to a Gavekal Dragonomics research, Evergrande has contract liabilities, or payments received in advance from homeowners, in the amount of 604 billion yuan ($83 billion), or roughly 600,000 housing units.

Beijing has prioritised finishing and delivering homes after the spread of incomplete apartments around the nation triggered unheard-of civil disobedience in June of last year.

“The government’s priority will clearly be to deliver unsold and unfinished housing to homebuyers,” said Christopher Beddor, deputy director of China research at Gavekal Dragonomics, referring to the Evergrande situation.

“You don’t need a formal government takeover, or even a SOE white-knight investor, for the government to start exerting massive influence over the company’s decisions, or for the entire industry to become more state-owned.”

During the week-long National Day break, Evergrande and China’s housing authorities did not immediately respond to demands for comment.

Evergrande disclosed that it was unable to issue fresh debt owing to an inquiry into its primary China company, casting doubt on its debt restructuring strategy even before the investigation into Hui became public.

It added that because home sales were falling short of projections, it will need to review the proposed restructuring’s terms late last month.

“For all of the restructuring … issuance of new notes to an extension is a core part, so I don’t know how you can get it done without that,” said Sandra Chow, co-head of Asia-Pacific research at CreditSights.

In its analysis, Gavekal said that it appeared to be getting harder and harder to, at the very least, restructure Evergrande in an orderly manner. On October 30, a Hong Kong court is due to hear an Evergrande liquidation petition.

Due to the sensitivity of the situation, a close friend of Evergrande who wished to remain anonymous claimed that although the debt restructuring would be postponed, it could still proceed under the direction of a risk management committee that the government had created.

A risk-management committee, which included representatives from state firms, was formed up at Evergrande in December 2021 as the liquidity situation at the company grew worse. The group’s purpose was to help with the debt and asset restructuring of the company.

However, an Evergrande bondholder who also declined to be identified claimed that the Hui inquiry was destined to thwart restructuring attempts and that the developer might still be liquidated even with government participation.

But it’s unclear how one of the biggest liquidations in history might go or what will happen to suppliers, homeowners waiting to get their units, creditors, particularly those located abroad, or suppliers.

Evergrande has been working to get creditors’ consent for restructuring offshore debt totaling $31.7 billion, which consists of bonds, collateral, and repurchase commitments. This is part of its $327 billion total liabilities as of the end of June.

Some experts question whether Evergrande has now changed from being too big to fail to being too complicated to exist because to the enormous debt load, declining cash flow, and the size of the unfinished residences.

Evergrande is so big that managing its collapse is necessary. In part due to size, (and) in part due to controlling expectations, according to INSEAD professor of economics Antonio Fatas.

In China, “there will always be a political question on how to share the losses associated with events like this one” due to the “political/economic system and because of the large interference of the government and state-owned enterprises.”

(Adapted from Reuters.com)

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