Evergrande's debt struggle rattles investors

Evergrande's debt struggle rattles investors
China Evergrande Group icon on office building wall. Image Shutterstock
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Updated 21 September 2021

Evergrande's debt struggle rattles investors

Evergrande's debt struggle rattles investors
  • Some commentators suggest Evergrande might become China’s “Lehman moment,” referring to the failure of Wall Street bank Lehman Brothers, a forerunner to the 2008 crisis
  • Evergrande’s Hong Kong-traded shares have fallen 85 percent since early 2021

Global investors are watching nervously as one of China’s biggest real estate developers struggles to avoid defaulting on tens of billions of dollars of debt, fueling fears of possible wider shock waves for the financial system.


Chinese regulators have yet to say what they might do about Evergrande Group. Economists expect Beijing to intervene if Evergrande and lenders can’t agree on how to handle its debts. But any official resolution is expected to involve losses for banks and bondholders.


The government “doesn’t want to be seen as engineering a bailout” but is likely to organize a debt restructuring to “reduce systemic risk and contain economic disruption,” Tommy Wu of Oxford Economics said in a report.


Evergrande is the biggest casualty yet from the ruling Communist Party’s effort to rein in surging debt levels Beijing sees as a possible threat to the economy.


Investors are watching how the developer headquartered in the southern city of Shenzhen near Hong Kong handles an interest payment due Thursday on one of its bonds.


Evergrande Group, founded in 1996, is one of China’s biggest builders of apartments, office towers and shopping malls and one of its biggest private sector conglomerates.


The company says it has more than 200,000 employees and supports 3.8 million jobs in construction and other industries. Evergrande says it has 1,300 projects in 280 cities and assets worth 2.3 trillion yuan ($350 billion).


Evergrande’s founder, Xu Jiayin, was China’s richest entrepreneur in 2017 with a net worth of $43 billion, according to the Hurun Report, which follows China’s wealthy. He has tumbled down the list as internet industries boomed but still ranked as China’s richest real estate developer last year.

He also topped Hurun’s 2020 list of philanthropists, giving away an estimated 2.8 billion yuan ($420 million).


Evergrande has branched out into electric vehicles, theme park development, health clinics, mineral water and other businesses.

Evergrande’s Hong Kong-traded shares have fallen 85 percent since early 2021. Its bonds are trading at an equally deep discount.


As of June 30, Evergrande reported 2 trillion yuan ($310 billion) of outstanding debts to bondholders, banks, construction contractors and other creditors.


Of that debt, 240 billion yuan ($37.3 billion) was due within a year, down 28.5 percent from the end of 2020 but nearly triple Evergrande's 86.8 billion yuan ($13.5 billion) in cash holdings, according to a company financial report.


In early 2021, Evergrande forecast its total annual transaction volume would surpass 2 trillion yuan ($310 billion). It reported a $1.4 billion first-half profit but says sales are weakening because news of its cash crunch is making would-be buyers nervous.

Evergrande was caught out by new limits regulators imposed on real estate-related borrowing as part of the Communist Party's marathon campaign to reduce reliance on debt.


Economists have been warning China’s rising debt is a potential threat for more than a decade. The ruling party has made reducing such financial risks a priority since 2018.

But total corporate, government and household borrowing rose to nearly 300 percent of economic output last year from 270 percent in 2018. Unusually high for a middle-income country.


News reports indicate Evergrande borrowed everywhere it could, including by requiring employees of its construction contractors to buy its debt.


In 2017, state-owned China Citic Bank in Shenzhen agreed to lend 40 billion yuan ($6.2 billion) for an Evergrande project only after its executives agreed to invest at least 3 million yuan ($465,000) each, according to the business news magazine Caixin.


The Communist Party has cracked down on debt as it tries to nurture self-sustaining economic growth based on domestic consumption instead of trade and debt-supported investment.


It allowed China's first corporate debt default since the 1949 revolution in 2014 as part of efforts to force borrowers and lenders to be more disciplined.

Until then, the government had intervened to bail out insolvent borrowers to avoid spooking financial markets. Beijing has gradually allowed more defaults, but none by a debtor as big as Evergrande.

Some commentators suggest Evergrande might become China’s “Lehman moment,” referring to the failure of Wall Street bank Lehman Brothers, a forerunner to the 2008 crisis. But economists say the risk of wider financial market contagion is low.


“A managed default or even messy collapse of Evergrande would have little global impact beyond some market turbulence,” said MacAdam of Capital Economics.


In the unlikely event of an outright default, China’s banking system has an annual profit of 1.9 trillion yuan and reserves of 5.4 trillion yuan against bad loans, “which could easily absorb the loss,” Larry Hu and Xinyu Ji of Macquarie Group said in a report.

WHAT NEXT?


Investors are waiting to see what Chinese regulators might do, but analysts say they appear to be focused on protecting home buyers by ensuring apartments already paid for are completed.


The government has injected money into other insolvent Chinese companies, but economists say Beijing appears determined to avoid doing that with Evergrande.


In a letter Tuesday to employees, Xu expressed confidence the company will survive.

 


“Evergrande will surely get out of the darkest moment as soon as possible,” Xu said in the letter marking the traditional Mid-Autumn Festival.


Gold edges lower as US Treasury yields rise

Gold edges lower as US Treasury yields rise
Updated 18 October 2021

Gold edges lower as US Treasury yields rise

Gold edges lower as US Treasury yields rise

BENGALURU: Gold edged lower on Monday as a rise in US Treasury yields dented its appeal, although a risk-off sentiment in wider financial markets limited losses for the metal.

Spot gold was down 0.1 percent at $1,765.14 per ounce by 1:35 p.m. EDT (1735 GMT), while US gold futures settled down 0.2 percent at $1,765.70.

“If yields keep rising, the headwinds will remain significant for gold,” OANDA analyst Craig Erlam said.

“Unless markets start to price in bad news for the economy and stock markets, which may be a rational next step if policymakers insist on tightening even as the recovery remains sluggish and downside risks significant.”

Sentiment in wider financial markets remained weak as economic growth in China slowed, while a relentless surge in oil prices fueled concerns about elevated inflation.

US benchmark 10-year Treasury yields climbed as investors ramped up rate hike bets, while the dollar index held steady.

While gold is seen as an inflation hedge, it also contends with the greenback for safe-haven status. Reduced central bank stimulus and the prospect of interest rate hikes push government bond yields up, weighing on non-yielding bullion.

Other precious metals also dipped, with silver down 0.3 percent at $23.21 per ounce and platinum slipping 1.8 percent to $1,035.29. Palladium shed 3.3 percent to $2,005.07, its lowest in over a week.


New York makes registration mandatory for crypto lending platforms

New York makes registration mandatory for crypto lending platforms
Updated 18 October 2021

New York makes registration mandatory for crypto lending platforms

New York makes registration mandatory for crypto lending platforms
  • State’s attorney general directs unregistered outlets to cease operations

RIYADH: New York has made it mandatory on cyrptocurrency lending platforms to register with the Office of the Attorney General if they wish to operate in the state or offer their products to New Yorkers.

New York Attorney General Letitia James on Monday said these steps are aimed to protect New York investors and markets from exploitation by high-risk virtual currency schemes.

The official also ordered the closure of two cryptocurrency lending platforms in New York and three other platforms were directed to provide information about their business.

“Cryptocurrency platforms must follow the law, just like everyone else,” James said.

The move comes weeks after the attorney general won a court order forcing the closure of cryptocurrency exchange Coinseed.

“My office is responsible for ensuring industry players do not take advantage of unsuspecting investors. We’ve already taken action against a number of crypto platforms and coins that engaged in fraud or that illegally operated in New York,” he said.


Saudi Venture Investment Co. launches initiative to support startups

Saudi Venture Investment Co. launches initiative to support startups
Updated 18 October 2021

Saudi Venture Investment Co. launches initiative to support startups

Saudi Venture Investment Co. launches initiative to support startups

RIYADH: The Saudi Venture Investment Co. has launched the “Investment in Accelerator Funds and Startup Studios" initiative, the Saudi Press Agency reported on Monday.
It is part of the company’s efforts to support startups in the Kingdom in the seed and pre-seed phases.
SVC has investments worth SR1.1 billion ($293.2 million) in 20 funds.
The company has supported around 116 startups since its establishment in 2018 till the end of the third quarter of 2021.
 


Saudi Arabia sees gasoline, diesel demand rise in 2021

Saudi Arabia sees gasoline, diesel demand rise in 2021
Updated 18 October 2021

Saudi Arabia sees gasoline, diesel demand rise in 2021

Saudi Arabia sees gasoline, diesel demand rise in 2021

RIYADH/CAIRO: Average motor and aviation gasoline demand in Saudi Arabia jumped to 470 thousand barrels per day (kbd) in 2021, compared to 455 kbd in 2020, data compiled by Arab News from Jodi revealed.
Calculations made for 2021 were up to August, the year’s latest data point so far.
The data reflects a recovery in gasoline demand as the effects of the pandemic start to taper off. However, the demand is still below the pre-pandemic levels. Average gasoline demand used to cross 500 kbd before 2020 in the Kingdom.
The data for 2021 is incomplete and a 12-month dataset might lead to a different conclusion.
Saudi motor and aviation gasoline demand reached 471 kbd in August, which was a marginal decline from the previous month's 473 kbd. In annual terms, 2021 recorded a 9kbd fall in demand as compared to last year's August, which stood at 480 kbd.
Similarly, the Kingdom’s average diesel demand slightly increased to 497 kbd in 2021, up from 492 kbd in 2020. Nevertheless, it is still below pre-2020 levels. In 2017-19, average diesel demand was above the 520 kbd mark.
Diesel is mainly used by trucks and hence could be roughly used as a gauge for the intensity of goods shipments across the country.
In August, the demand for diesel reached 532 kbd, which was moderately higher than the same month last year by 11 kbd. It was also noticeably greater than the previous month’s demand as it recorded a monthly increase of 41 kbd.


Bitcoin rises near 6-month high, as ETF launch date approaches: Market wrap

Bitcoin rises near 6-month high, as ETF launch date approaches: Market wrap
Updated 18 October 2021

Bitcoin rises near 6-month high, as ETF launch date approaches: Market wrap

Bitcoin rises near 6-month high, as ETF launch date approaches: Market wrap

RIYADH: ProShares is set to launch a Bitcoin futures exchange-traded fund on the New York Stock Exchange on Tuesday, in what would be a first for institutional investors in the US, New York Times reported.

The ETF will provide institutional investors and retail investors exposure to Bitcoin, who cannot legally or do not want direct exposure, through a brokerage account.

“When we have a Bitcoin ETF in the US, billions and billions of dollars will flow into Bitcoin that under no circumstances would have found their way into Bitcoin otherwise,” MicroStrategy CEO Michael Saylor said.

Stablecoins

Asset-backed stablecoins do not pose a systemic risk to the US financial system and should not face a new set of rules, a major cryptocurrency lobby group told US regulators on Monday, as tighter oversight of the fast-growing technology looms.

Stablecoins — digital tokens usually backed by reserves of dollars or assets from gold to other cryptocurrencies — have ballooned during the COVID-19 pandemic.

As a result, the President’s Working Group on Financial Markets — which comprises top US regulators including the Treasury and Federal Reserve — is focusing on them as part of wider efforts to rein in crypto.

The group is widely expected to publish in the coming months a report detailing the risks and opportunities of stablecoins.

Adoption

The Central Bank of Brazil released a report showing that Brazilians have bought more than $4 billion in cryptocurrency imports since the beginning of the year.

The report also shows that Brazilians have consistently earned more than $350 million in cryptocurrencies every month since January.

However, according to some analysts from the central bank, this number is likely to reach twice its value this year.

Brazilians investing in cryptocurrencies abroad are likely to triple the amount invested in American shares, according to Bruno Serra the director of monetary policy of the Central Bank of Brazil.

Crypto regulation

Nasdaq-listed crypto exchange, Coinbase has published its proposal for crypto regulation after more than 75 meetings with stakeholders in government, industry, and academia.

“Today we’re launching our Digital Asset Policy Proposal, which we hope will help chart a course for clear regulation of cryptocurrency and web 3.0 in the US. It’s critical to bring clarity to this space and ensure America remains a financial leader,” Coinbase CEO Brian Armstrong tweeted.

ATMs

Popular BTM Operator, Bitcoin of America, recently announced their newest addition to their Bitcoin ATM machines.

Ethereum is available now for buy and sell at Bitcoin of America ATM locations due to its growing popularity,  it also offers Bitcoin and Litecoin options online and at their BTM locations.

Trading

Bitcoin, the leading cryptocurrency in trading internationally, traded higher on Monday, rising by 1.62 percent to $61,891 at 6 p.m. Riyadh time.

Ether traded at $3,769, down 1.94 percent, according to data from CoinDesk.