Troubled developer China Evergrande Group has filed for US bankruptcy protection in one of the world’s biggest debt restructuring deals amid mounting concerns about China’s deepening housing crisis and its impact on the flagging economy.
China unexpectedly cut several key interest rates earlier this week to boost sluggish economic activity and is expected to cut key lending rates on Monday. But analysts say the steps taken so far have been too little and too late, and much more vigorous action is needed to stem the economy’s downward spiral.
Evergrande, once China’s top-grossing developer by revenue, has become the poster child for an unprecedented debt crisis in the country’s real estate sector, which accounts for about a quarter of the country’s economy, after it faced a liquidity crisis in mid-2021.
The developer has filed for protection under Chapter 15 of the US Bankruptcy Act, which protects non-US companies undergoing reorganization from creditors hoping to sue them or tie up assets in the United States.
Although the move is seen as procedural, it suggests the company is nearing the end of its restructuring process after more than a year and a half of negotiations with creditors.
Evergrande said in a filing on Friday that it will seek US court recognition of offshore debt restructuring agreements for Hong Kong and the British Virgin Islands because its dollar bills are governed by New York law.
“The filing is a normal process for offshore debt restructuring and does not involve a bankruptcy petition,” the filing said, adding that it is moving forward with offshore debt restructuring.
The company proposed that a Chapter 15 endorsement hearing be scheduled for September 20.
Evergrande’s offshore debt restructuring totals $31.7 billion, including bonds, collateral and buyback commitments. The company will meet with creditors later this month on its restructuring proposal.
Since Evergrande ran into trouble, a number of Chinese property developers have defaulted on their offshore debt obligations, leaving unfinished homes and unpaid suppliers, shaking consumer confidence in the world’s second largest economy. Real estate investments, sales and housing starts have been declining for over a year.
The housing crisis has also fueled fears of a financial system contagion, which could have a destabilizing effect on an economy already weakened by subdued domestic and external demand, flagging factory activity and rising unemployment.
A major Chinese wealth manager has missed repayment obligations on some investment products and warned of a liquidity crisis, while Country Garden, the country’s leading private project developer, has become the latest company to report a crushing liquidity crisis.
Angry investors in trust products from Zhongrong International Trust Co., a unit of the asset manager, have lodged letters of complaint with regulators, urging authorities to intervene after the trust company failed to make payments.
Nomura followed some of the big global brokerage firms on Friday in lowering China’s growth forecast for this year. China’s gross domestic product is now expected to grow 4.6% this year, down from a previous forecast of 5.1%, but much of that growth is likely to have come in the first quarter after tough COVID restrictions were lifted.
China is targeting 5% growth this year, but a growing number of economists are warning that the target could be missed unless Beijing steps up its supportive measures.
China’s economic and real estate problems and the lack of concrete economic stimulus measures have led to a slowdown on the world markets. Asian equities fell for the third straight week. Chinese blue chips fell 1.2% on Friday and Hong Kong’s Hang Seng Index fell 2.1%.
To boost investor confidence, China’s securities regulator announced on Friday that it would cut trading costs and support share buybacks, while unveiling measures to revive the stock market.
So far, however, the level of support Beijing has offered has not convinced financial markets, and some analysts are wondering whether policymakers are willing to risk adding to the debt pile, created in part by massive stimulus measures in the past .
“Of course, the economic downturn is putting a great strain on financial sector balance sheets and increasing the risk of a serious policy mistake if those responsible do not handle the situation cautiously. But we still believe that a full-blown financial crisis is more of a tail risk than a likely outcome,” Capital Economics said in a report.