Chinese cities seize pre-sales from Evergrande to block potential embezzlement

Updates from the Evergrande real estate group

At least two local governments in China have taken control of income from sales of Evergrande properties, even as Beijing has remained silent on the ongoing liquidity crunch at the world’s most indebted developer and investors braced for more missed bond payments.

In a circular published Wednesday and seen by the Financial Times, the Nansha District Housing and Urban and Rural Construction Bureau in the southern city of Guangzhou asked an Evergrande branch to put the pre-sale income from Sunshine Peninsula, a stalled residential development, in a controlled custody account so that “the interests of buyers can be protected and construction on the project continues.”

Another housing office in Zhuhai District, a city in southern Macau neighboring Macau, this month asked a residential project in Evergrande to transfer the proceeds from the sale to a government account, according to people with knowledge of the matter.

These measures marked an escalation in efforts to limit the impact of the Evergrande debt crisis, which rocked global financial markets last week and sparked protests from suppliers and investors, who fear it will not be. reimbursed in the event of default. The developer has struggled to access credit following Beijing’s crackdown on growing real estate indebtedness amid a post-pandemic real estate bubble.

Fears of a wider contagion intensified after investors in an offshore Evergrande bond failed to receive interest payments before a closely watched deadline last week.

Evergrande, which has not made a statement on the $ 83.5 million coupon, has a 30-day grace period before triggering a default.

According to Caixin, a Chinese financial magazine, up to eight other provinces have asked Evergrande since August to put pre-sales revenue in custody accounts, as the cash-strapped developer has put hundreds of unfinished projects on hold. .

“It is common for Chinese developers to direct sales proceeds to particular projects for other uses, ranging from paying off debt to buying land,” said Bo Zhuang, Singapore-based economist at Loomis Sayles, asset manager. “It is no longer an option,” he added.

Evergrande did not respond to a request for comment on Sunday.

Project delays and construction suspensions have cast a shadow over expectations for what could become the biggest debt restructuring of Chinese companies. Evergrande faces a total of Rmb 1.97 billion ($ 305 billion) in liabilities, including $ 20 billion of outstanding debt in offshore markets.

At the start of the month, progress had stalled in hundreds of Evergrande’s ongoing projects across China, most of which have been fully sold, according to people close to the company. The suspended developments have sparked a flood of complaints online as well as public protests from anxious homebuyers and retail investors.

“I spent my savings on the apartment,” said a Guangzhou resident nicknamed Zhu who bought a two-bedroom apartment in Sunshine Peninsula for Rmb 2.1 million ($ 325,000). “My life will be ruined if the project cannot be completed.”

Zhu added that his payments for the apartment were not showing in the project account. “I don’t know where the money went,” he said.

Beijing has made project completion a top priority in tackling the Evergrande debacle, indicating authorities’ concern that public discontent with the company could threaten social stability, a top concern. Chinese leaders.

This prompted local authorities to put the developer’s pre-sale proceeds under their watch so that funding for the project does not go elsewhere.

“There is no way for our head office to transfer the money now that it is in a government account,” said an official from Sunshine Peninsula, which is expected to resume construction after a five-month suspension.

But to what extent will government interventions revive stalled projects where sales proceeds had already been reallocated remains an open question.

Financial difficulties have spread through the sprawling group: In a regulatory filing Friday, Evergrande New Energy, its electric vehicle unit, warned it was facing a “severe shortage of funds” and would be forced to suspend operations and possibly the salaries of the employees. without “new injection of capital”.

An Evergrande executive noted that local governments also provide political incentives, such as the go-ahead for the sale of properties on projects that did not meet zoning requirements, to help improve Evergrande’s cash flow. .

The developer faces other upcoming deadlines, including a payment of $ 45 million due Wednesday on a bond maturing in 2024.

“The idea is to use any political tools to help us sell faster within the existing legal framework,” the executive said.

Still, the measures would not completely close the funding gap needed to complete the projects, the executive added.

“We just don’t have enough resources to complete all of the projects on time. We need more outside help.

Additional reporting by Edward White in Seoul

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