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China is sabotaging the Evergrande to stem the asset crisis

(Bloomberg) — Chinese officials are considering a proposal to liquidate China Evergrande Group by selling a large part of its assets, according to people familiar with the matter.

The restructuring proposal, submitted to Beijing by officials in Evergrande’s home province of Guangdong, calls on the developer to sell off most of its assets except for its separately listed asset management and electric vehicle units, the people said, not wanting to discuss a private matter. said. China Cinda Asset Management Co., a group led by a state-owned bad debt manager and major Evergrande creditor, will acquire any unsold assets, the people said.

If approved by senior officials in Beijing, the plan could lead to the disorderly collapse of the world’s most indebted developer from crippling China’s financial markets and economy before the Communist Party’s leadership change by Xi Jinping’s government later this year. It would be the biggest step ever to stop it.

Proceeds from the sale of the assets will be used to repay creditors, although it is not clear to what extent banks and bondholders will be forced to accept a deduction on their claims. Senior Chinese regulators have repeatedly said in public comments that credit risk at Evergrande and other troubled property companies should be dealt with in a “market-oriented manner”.

Evergrande’s asset management and electric vehicle venture, with a combined market value of about $9 billion, will be initially retained under the offer, but could be sold at a later date, the people said. A custodial account will be set up to provide some protection to offshore investors for these assets, one of the people said.

If Beijing signs off on the plan, it would begin to open up to a debt-ridden developer started 25 years ago by billionaire chairman Hui Ka Yan. It will probably also set off a protracted battle, which is paid off by leftovers.

The haircut ultimately borne by creditors will be closely scrutinized by investors as Xi plans to balance the sometimes competing goals of reducing moral hazard in China’s financial system and maintaining economic stability. . The Chinese leader, who is widely expected to secure an anti-missile third term this year – and potentially extend his rule even longer – to ease his “general prosperity” campaign As part of the demand to rein in the billionaire class. Yawning money difference.

While Xi has surprised many investors with his commitment to curb financial excesses in the real estate sector, the government has recently dialed back its action amid growing concerns about an industry-wide transition. The International Monetary Fund warned on Tuesday that China’s housing slowdown is one of the risks to global economic growth.

Responding to questions from Bloomberg, Cinda said she has “no relevant information to disclose at this time.” Evergrande and Guangdong government officials did not immediately respond to requests for comment. REDD last week reported on some aspects of the Guangdong proposal, saying officials could announce a framework before March 5.

Shares of Evergrande fell 4.5% at 1:29 p.m. in Hong Kong and its dollar bond changed little.

The developer said in a statement on Wednesday that it plans to come up with an initial restructuring proposal in the next six months. It previously urged offshore bondholders not to take aggressive legal action on repayments, after an ad-hoc group of holders said the company failed to engage with it on restructuring efforts. Evergrande has begun the process of identifying bondholders and plans to hire additional financial and legal advisors.

For the first time in December, the developer was declared a defaulter after he defaulted on several bond payments. Evergrande set up a seven-member risk management committee to “actively engage” with creditors at the time.

The panel consists of senior managers of state-owned enterprises of Sinda and Guangdong Province. Evergrande has also appointed the chairman of China Cinda (HK) Holdings Company as non-executive director. On Wednesday, China Business News reported that regulators held a recent meeting with several asset-management companies to discuss their involvement in the disposal of property developers’ assets.

Evergrande’s cash crunch has become a focus for global investors, worried that a collapse could lead to a financial contagion and stifle growth in the world’s second-largest economy, which is the largest economy in the world. About a quarter depends on the housing market.

The developer sees its bond business at par discount as investors could be facing one of China’s biggest restructurings. Evergrande’s dollar note in 2025 was pointed at about 16 cents on Thursday. Its stock has fallen nearly 90% since the start of 2021.

While Chinese officials have eased their real estate crackdown in recent weeks, they have made it clear they have no appetite for an Evergrande rescue. The central bank in October blamed the developer’s woes on its “blind expansion and diversification” and failure to act prudently amid changing market conditions.

Evergrande has made little progress in asset sales in recent months, even though Hui has made stakes in once-prize businesses like the bottled-water unit on the block. The developer ended talks in October to sell a controlling stake in its asset-management business that could raise about $2.6 billion. Plans to sell its Hong Kong headquarters have also stalled.

Electric cars and service units are now worth more than Evergrande, with a market value of less than $3 billion. China Evergrande New Energy Vehicle Group Ltd., which has also collapsed over the past year, has yet to mass-produce any cars. Evergrande Property Services Group Limited manages and services apartments built by Evergrande and other developers.

Evergrande is prioritizing payments to migrant workers and suppliers as regulators urge the company to address any risk of social unrest.

It is also under pressure to finish the home for the 1.6 million buyers who have already made deposits, and to repay retail investors who bought some of its money products to be used to finance the construction. The developer has more than $300 billion in total liabilities, which includes over $19 billion in offshore bonds.

© 2022 Bloomberg LP

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