Evergrande vultures swoop into moral hazard
HONG KONG, Oct 20 (Reuters Breakingviews) – Fools rushed in to China Evergrande (3333.HK). The embattled Chinese real estate developer’s deals to sell its headquarters and property management arms may have run into political snags. Overpay for the assets and it looks like a bailout while a lowball bid invites cries of opportunism. Hesitant governments can hurt more than they help.
The heavily indebted company’s shares have been suspended from trading for more than two weeks, as have those of its Evergrande Property Services (6666.HK), amid expectations that smaller rival Hopson Development (0754.HK) was poised to buy a 51% stake. At market prices, that would have brought in $3.6 billion. The cash-strapped developer was also in talks to sell its Hong Kong headquarters read more for $1.7 billion. Both transactions have stalled , according to recent Reuters reports.
Beijing has been keen for Evergrande to serve as a warning to the wider property sector, whose borrowing capabilities are being curbed by a so-called “three red lines” policy. The central bank on Friday also made it clear it considers Evergrande a single bad apple read more and is not fearful of a systemic crisis. If the assessment is correct, it could be useful to make an example of Evergrande.
The approach, however, may be causing local officials to flinch. That risks added contagion if it prevents Evergrande from raising cash and smaller creditors can recover less. The Guangdong provincial government might well be what’s standing in the way of Evergrande’s plan to offload its property management business while state-backed Yuexiu (0123.HK), the office tower bidder, was also told to hold back, based on the Reuters story. Evergrande has not commented on either situation.
It’s reasonable enough for bargain-hunters to be fearful of swooping into a sticky situation. It is up to officials, however, to foster the confidence needed to help recover as much as possible. Otherwise, a messy situation often gets messier.
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– China Evergrande’s efforts to sell a 51% stake in its $7.1 billion property management unit have stalled, Reuters reported on Oct. 19, citing unnamed sources.
– The difficulties follow a previous Reuters report on Oct. 15 that the heavily indebted Chinese real estate developer’s planned $1.7 billion sale of its Hong Kong headquarters was on the brink of collapse after state-backed Yuexiu Property pulled out of the deal.
– Fears of an Evergrande collapse led to an 80% decline in its market value in 2021 before trading in the shares was suspended on Oct. 4.
Editing by Jeffrey Goldfarb and Katrina Hamlin
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