The world is still waiting to find out what will happen to troubled Chinese conglomerate Evergrande and its enormous mountain of debt.
The property developer’s debt crisis is a major test for Beijing. Some analysts fear it could even turn into China’s Lehman Brothers moment, sending shockwaves across the world’s second biggest economy. Real estate — and related industries — account for as much as 30% of Chinese GDP.
The coming days and weeks will be critical. While Evergrande has a grace period of up to 30 days on an interest payment of nearly $84 million that was due Thursday, it’s supposed to make a payment on another bond next week.
That’s fueling speculation over what could happen next, with potential outcomes including a Beijing-backed bailout, restructuring or default.
Here’s what you need to know about Evergrande, and how it got to where it is now.
WHAT IS EVERGRANDE?
Evergrande is one of China’s largest real estate developers. The company is part of the Global 500 — meaning that it’s also one of the world’s biggest businesses by revenue.
The group was founded by Chinese billionaire Xu Jiayin, also known as Hui Ka Yan in Cantonese, who was once the country’s richest man.
Evergrande made its name in residential property — it boasts that it “owns more than 1,300 projects in more than 280 cities” across China — but its interests extend far beyond that.
Outside housing, the group has invested in electric vehicles, sports and theme parks. It even owns a food and beverage business, selling bottled water, groceries, dairy products and other goods across China.
In 2010, the company bought a soccer team, which is now known as Guangzhou Evergrande. That team has since built what is believed to be the world’s biggest soccer school, at a cost of US$185 million to Evergrande.
Guangzhou Evergrande continues to reach for new records: It’s currently working on creating the world’s biggest soccer stadium, assuming that construction is completed next year as expected. The $1.7 billion site is shaped as a giant lotus flower, and will eventually be able to seat 100,000 spectators.
Evergrande also caters to tourists through its theme park division, Evergrande Fairyland. Its claim to fame is a massive undertaking called Ocean Flower Island in Hainan, the tropical province in China commonly referred to as the “Chinese Hawaii.”
The project includes an artificial island with malls, museums and amusement parks. According to the group’s most recent annual report, it started taking customers on a trial basis earlier this year, with plans for a full opening “at the end of 2021.”
HOW DID IT RUN INTO TROUBLE?
In recent years, Evergrande’s debts ballooned as it borrowed to finance its various pursuits.
The group has gained infamy for becoming China’s most indebted developer, with more than $300 billion worth of liabilities. Over the last few weeks, it’s warned investors of cash flow issues, saying that it could default if it’s unable to raise money quickly.
That warning was underscored this month, when Evergrande disclosed in a stock exchange filing that it was having trouble finding buyers for some of its assets.
In some ways, the company’s aggressive ambitions are what landed it in hot water, according to experts. The group “strayed far from its core business, which is part of how it got into this mess,” said Mattie Bekink, China director of the Economist Intelligence Unit.
Goldman Sachs analysts say the company’s structure has also made it “difficult to ascertain a more precise picture of [its] recovery.” In a recent note, they pointed to “the complexity of Evergrande Group, and the lack of sufficient information on the company’s assets and liabilities.”
But the group’s struggles are also emblematic of underlying risks in China.
“The story of Evergrande is the story of the deep [and] structural challenges to China’s economy related to debt,” said Bekink.
The issue isn’t entirely new. Last year, a slew of Chinese state-owned companies defaulted on their loans, raising fears about China’s reliance on debt-fueled investments to support growth.
And in 2018, billionaire Wang Jianlin was forced to downsize his conglomerate, Dalian Wanda, as Beijing clamped down on firms borrowing heavily to push overseas.
In a recent note, Mark Williams, Capital Economics’ chief Asia economist, said that Evergrande’s collapse “would be the biggest test that China’s financial system has faced in years.”
“The root of Evergrande’s troubles — and those of other highly-leveraged developers — is that residential property demand in China is entering an era of sustained decline,” he wrote. “Evergrande’s ongoing collapse has focused attention on the impact a wave of property developer defaults would have on China’s growth.”
HOW IS IT TRYING TO MOVE FORWARD?
Evergrande said Wednesday in a filing with the Shenzhen Stock Exchange that issues regarding a payment on a domestic yuan bond have been “settled through negotiations.” The amount of interest it owed on the bond is about 232 million yuan ($36 million), according to data from Refinitiv.
While the news may placate investors, many questions still remain unanswered. Evergrande did not elaborate on the terms of the payment in its statement, and interest worth $83.5 million on a dollar-denominated bond also fell due Thursday. That deadline came and went without an update from the company.
On September 14, Evergrande announced that it had brought on financial advisers to help assess the situation.
While those firms are tasked with exploring “all feasible solutions” as quickly as possible, Evergrande has cautioned that nothing is guaranteed.
So far, the conglomerate has struggled to stem the bleeding, and has failed to find buyers for parts of its electric vehicle and property services businesses.
As of that filing, it had made “no material progress” in its search for investors, and “it is uncertain as to whether the group will be able to consummate any such sale,” it said.
The company has also been trying to sell off its office tower in Hong Kong, which it bought for about $1.6 billion in 2015. But that has “not been completed within the expected timetable,” it said.
HOW ARE INVESTORS REACTING?
Evergrande’s problems spilled onto the streets this month when protests broke out at its headquarters in Shenzhen. Footage from Reuters showed scores of demonstrators at the site last week, accosting someone identified to be a company representative.
But shareholders have been wary for months: The stock has shed nearly 85% of its value this year.
Earlier this month, Fitch and Moody’s Investors Services both downgraded Evergrande’s credit ratings, citing its liquidity issues. “We view a default of some kind as probable,” Fitch wrote in a recent note.
The situation also appears to be spooking investors in China more broadly, at a time when they’re already reeling from Beijing’s crackdown on private sector companies, particularly in the tech sector. Stocks in Hong Kong, New York and other major markets have been swayed by fears of contagion from Evergrande and a slowdown in Chinese growth.
“In our opinion, how Evergrande credit stresses will be resolved will drive market sentiment,” Goldman Sachs analysts wrote recently, referring to the credit market and the broader economy. They added that the Chinese bond market could be hit and a loss of confidence could “spill over to the broader property sector.”
WHAT COULD HAPPEN NEXT?
The Chinese government appears to be starting to intervene.
Over the past few days, the People’s Bank of China has injected some cash into the financial system, to help boost liquidity in the short term and settle nerves.
According to Bloomberg, the net injection for banks was 460 billion yuan ($71 billion) sometime this week, including 70 billion yuan ($10.8 billion) on Friday.
Authorities are clearly watching closely, while attempting to project calm.
Last week, Fu Linghui, a spokesperson for China’s National Bureau of Statistics, acknowledged the difficulties of “some large real estate companies,” according to state media.
Without naming Evergrande directly, Fu said that China’s real estate market had remained stable this year but the impact of recent events “on the development of the whole industry needs to be observed.”
Last week, Bloomberg also cited anonymous sources as saying that regulators had enlisted international law firm King & Wood Mallesons, among other advisers, to examine the conglomerate’s finances. King & Wood Mallesons declined to comment.
According to the report, officials in Evergrande’s home province of Guangdong have already rejected a bailout request from its founder. Guangdong authorities and Evergrande did not respond to a request for comment.
Beijing has few good choices. It will want to protect the thousands of Chinese people who have bought unfinished apartments, as well as construction workers, suppliers and small investors.
Authorities will also likely aim to limit the risk of other real estate firms going under. But at the same time, they have long been trying to rein in excessive borrowing by developers — and won’t want to dilute that message.
Even with cash infusions, some suggest it may already be too late to save the company.
Evergrande’s financial problems have been widely dubbed by Chinese media as “a huge black hole,” implying that no amount of money can resolve the issue.
“China has really been trying to clean up its bad corporate debt for years. And although they made some progress before the pandemic, the task often seems interminable, and that’s what you’re certainly seeing here,” said Bekink.
“The impacts from a large default by Evergrande would be remarkable.”
— Kristie Lu Stout, Julia Horowitz, Laura He and CNN’s Beijing bureau contributed to this report.
World Bank sees ‘significant’ inflation risk from high energy prices
Energy Prices are expected to inch up in 2022 after surging more than 80% in 2021, fueling significant near-term risks to global inflation in many developing countries, the World Bank said in its latest Commodity Markets Outlook on Thursday.
The multilateral development bank said energy prices should start to decline in the second half of 2022 as supply constraints ease, with non-energy prices such as agriculture and metals also expected to ease after strong gains in 2021.
“The surge in energy prices poses significant near-term risks to global inflation and, if sustained, could also weigh on growth in energy-importing countries,” said Ayhan Kose, chief economist and director of the World Bank’s Prospects Group, which produces the Outlook report.
“The sharp rebound in commodity prices is turning out to be more pronounced than previously projected. Recent volatility in prices may complicate policy choices as countries recover from last year’s global recession.”
The International Monetary Fund, in a separate blog https://blogs.imf.org/2021/10/21/surging-energy-prices-may-not-ease-until-next-year, said it expected energy prices to revert to “more normal levels” early next year when heating demand ebbs and supplies adjust. But it warned that uncertainty remained high and small demand shocks could trigger fresh price spikes.
The World Bank noted that some commodity prices rose to or exceeded levels in 2021 not seen since a spike a decade earlier.
Natural gas and coal prices, for instance, reached record highs amid supply constraints and rebounding demand for electricity, although they are expected to decline in 2022 as demand eases and supply improves, the bank said.
It warned that further price spikes could occur in the near-term given current low inventories and persistent supply bottlenecks. Other risk factors included extreme weather events, the uneven COVID-19 recovery and the threat of more outbreaks, along with supply-chain disruptions and environmental policies.
Higher food prices were also driving up food-price inflation and raising questions about food security in several developing countries, it said.
The bank projected crude oil prices would reach $74/bbl in 2022, buoyed by strengthening demand from a projected $70/bbl in 2021, before easing to $65/bbl in 2023.
The use of crude oil as a substitute for natural gas presented a major upside risk to the demand outlook, although higher energy prices may start to weigh on global growth.
The bank forecast a 5% drop in metals prices in 2022 after a 48% increase in 2021. It said agricultural prices were expected to decline modestly next year after jumping 22% this year.
It warned that changing weather patterns due to climate change also posed a growing risk to energy markets, potentially affecting both demand and supply.
It said countries could benefit by accelerating installation of renewable energy sources and by cutting their dependency on fossil fuels.
(Reporting by Andrea Shalal; editing by Diane Craft)
U.S. FAA seeks new minimum rest periods for flight attendants between shifts
The Federal Aviation Administration (FAA) is proposing to require flight attendants receive at least 10 hours of rest time between shifts after Congress had directed the action in 2018, according to a document released on Thursday.
Airlines for America, a trade group representing major carriers including American Airlines, Delta Air Lines, United Airlines and others, had previously estimated the rule would cost its members $786 million over 10 years for the 66% of U.S. flight attendants its members employ, resulting from things like unpaid idle time away from home and schedule disruptions.
Aviation unions told the FAA the majority of U.S. flight attendants typically do receive 10 hours of rest from airlines but urged the rule’s quick adoption for safety and security reasons.
Under existing rules, flight attendants get at least 9 hours of rest time but it can be as little as 8 hours in certain circumstances.
“Flight attendants serve hundreds of millions of passengers on close to 10 million flights annually in the United States,” the FAA said, adding that they “perform safety and security functions while on duty in addition to serving customers.”
It cited reports about the “potential for fatigue to be associated with poor performance of safety and security related tasks,” including in 2017, when a flight attendant reported almost causing the gate agent to deploy an emergency exit slide, which was attributed to fatigue and other issues.
The FAA estimated the regulation could prompt the industry to hire another 1,042 flight attendants and cost $118 million annually. If hiring assumptions were cut in half, it said, that would cut estimated costs by over 30%.
After the FAA published an advance notice of the planned rules in 2019, Delta announce it would mandate the 10-hour rest requirement by February 2020.
FAA Administrator Steve Dickson is testifying at a U.S. House Transportation subcommittee hearing on Thursday.
House Transportation Committee chairman Peter DeFazio said on Wednesday that it was “unacceptable” to delay the FAA adopting the flight attendant rest rule and mandating secondary flight deck barriers to better protect the cockpits on all newly manufactured airliners.
Attorneys at the FAA “need a little poke” to move faster on rules when ordered by Congress, DeFazio said on Thursday at the hearing. “Do not screw around with it for three years… you just do it.”
Sara Nelson, president of the Association of Flight Attendants representing 50,000 workers at 17 airlines, said the rule was critical.
“Flight attendant fatigue is real. COVID has only exacerbated the safety gap with long duty days, short night, and combative conditions on planes,” she said. “Congress mandated 10 hours irreducible rest in October 2018, but the prior administration put the rule on a process to kill it.”
During the pandemic, flight attendants have dealt with records numbers of disruptive, occasionally violent passenger incidents, with the FAA citing 4,837 unruly passenger reports, including 3,511 for refusing to wear a mask since Jan. 1.
The FAA proposes to make the new flight attendant rest rules final 30 days after it publishes its final rules.
(Reporting by David Shepardson; editing by Jason Neely and Bill Berkrot)
Bitcoin price hits all-time high, one day after U.S. ETF debut – Global News
The world’s leading cryptocurrency was up 3.30 per cent, trading at US$66,364.72, after reaching a record of US$67,016.50, topping the US$64,895.22 hit on April 14 this year.
Tuesday was the first day of trading for the ProShares Bitcoin Strategy ETF — a development market participants say is likely to drive investment into the digital asset.
The ETF closed up 2.59 per cent at US$41.94 from its opening price of US$40.88 on Tuesday and continued its ascent on Wednesday, last up 3.76 per cent at US$43.52.
The Valkyrie Bitcoin Strategy ETF, expected to debut on the Nasdaq Wednesday, appeared to be delayed after its prospectus was amended in a filing with the Securities and Exchange Commission. A person familiar with the matter said the Nasdaq expects the ETF to launch on Thursday, but that has not been confirmed yet.
El Salvador becomes 1st country to adapt Bitcoin as legal tender
Trading appeared to be dominated by smaller investors and high-frequency trading firms, analysts said, noting the absence of large block trades indicated that institutions were likely staying on the sidelines.
James Quinn, managing partner at Q9 Capital, a Hong Kong-based cryptocurrency private wealth manager, said the launch of the new product was “meaningful” for bitcoin.
Theoretically, any licensed brokerage firm in the United States which wants to take on this ETF can do so as easily as any other ETF, which “should make it available to a lot of folks,” said Quinn.
While the ETF is based on bitcoin futures, Quinn said the trades and hedges underpinning the ETF means activity will flow into the spot market and the bitcoin price.
Crypto ETFs have launched this year in Canada and Europe amid surging interest in digital assets. VanEck is also among fund managers pursuing U.S.-listed ETF products, although Invesco on Monday dropped its plans for a futures-based ETF.
Ether, the world’s No. 2 cryptocurrency, was up 3.63 per cent on the day at US$4,018.75, after hitting a high of US$4,080, nearing its record high of US$4,380 reached on May 12.
© 2021 Reuters
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