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How Canada is exposed to ripple effects of Evergrande debt crisis – The Globe and Mail

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Fairmont Le Chateau Montebello is seen in Montebello, Que., on Thursday, Sept. 23, 2021.

Justin Tang/The Globe and Mail

Canada’s largest pension funds and banks have limited direct ties to the Evergrande Group debt crisis, a review of their investment holdings shows, but there’s little question the Chinese company’s collapse would have painful knock-on effects, even if those indirect reverberations are difficult to quantify.

It would be “naive to think that the turmoil in the market doesn’t have the potential to have second-order and third-order impact,” Noel Quinn, chief executive officer of HSBC Holdings PLC, told a conference Wednesday. “Clearly with the changes that are taking place in the Evergrande situation, it’s concerning.”

Also Wednesday, after Evergrande’s inability to meet interest payments sent global markets tumbling, the company reached an agreement with domestic bond holders that appeared to ease investor concerns about contagion. Meanwhile, China’s central bank injected US$18.5-billion in liquidity into the banking system, which brought further calm.

Canadian banks have no direct lending exposure to Evergrande or to China’s real estate sector, and the Big Six banks have less than 1 per cent of their equity capital – about $1.4-billon combined – in legal entities in China, according to a research note by Sohrab Movahedi of BMO Nesbitt Burns Inc.

Banks could have indirect exposure to counterparty risk in capital markets or to equity markets through wealth management, “but we estimate these to be insignificant to balance sheet and/or the earnings profile of the banks,” he wrote.

Life insurers have no direct exposure to Evergrande’s debt or real estate and the risk from contagion is limited, Mr. Movahedi said. Investments in China account for only about 10 per cent of Manulife Financial Corp.’s $1.9-billion in invested fund assets in Asia, for example.

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Some pension funds such as Canadian Pension Plan Investment Board and Caisse de dépôt et placement du Québec have held small equity stakes in Evergrande, and in other Chinese real estate companies such as China Vanke Co. Ltd. But some of the holdings Canadian asset managers held in Evergrande were required to satisfy index funds.

A subsidiary of Royal Bank of Canada, British-based BlueBay Asset Management, held a small number of bonds issued by Evergrande worth tens of millions of dollars, but sold some of those bonds this year and has immaterial exposure as of July 31, according to data from Refinitiv.

An RBC spokesperson declined to comment on specific fund holdings.

With Evergrande on the hook for US$305-billion to banks, homebuyers and suppliers, the majority of which are in China, the company has been scrambling in recent weeks to unload assets to raise cash.

In addition to managing 565 million square metres of land in nearly 300 cities in mainland China and Hong Kong, according to its latest annual report, Evergrande has its fingers in a sprawling array of industries, from bottled water to electric vehicles.

Much of it is now on the block, which begs the question of how long it will be before Evergrande puts a for sale sign up at its lone Canadian holding, the Fairmont Le Château Montebello.

Evergrande snapped up the historic hotel two hours west of Montreal in 2014, marking its first foray into Canada, leaving many to wonder if China’s second-largest developer was about to join the influx of other Chinese real estate companies reshaping this country’s largest cities.

With Evergrande now buckling under its debt load, roiling global markets this week with fears its collapse could touch off a global credit crisis, it’s no small measure of relief the property giant went no further in Canada than owning the world’s largest log cabin.

Guests arrive by the entrance archway leading to the Fairmont Le Chateau Montebello in Montebello, Que., on Sept. 23, 2021. The chateau is the lone Canadian holding of Evergrande Group.

Justin Tang/The Globe and Mail

Genevieve Dumas, general manager of Château Montebello, said she had no knowledge of what Evergrande’s plans for the hotel might be, and directed questions to the company’s representatives in China. Evergrande didn’t respond to a request for comment.

Several hotel industry watchers said they had not heard of any move to sell the Fairmont property. They also said new investment in the Canadian industry from China has been sparse.

“We haven’t seen any meaningful inbound capital from China and in fact have seen some repatriation,” said Alam Pirani, executive managing director with Colliers’s hotel division.

There are also some indications Chinese investors were already reducing their exposure to Canada.

Jia Wang, interim director of the China Institute at the University of Alberta, said Chinese investment in Canada was already coming down before the Evergrande crisis and before Beijing started trying to discourage property developers from borrowing too heavily.

Last year, Chinese investment and purchases in Canada totalled $1.98-billion, down from $4.05-billion in 2019, according to the institute, which tracks all Chinese investment in Canada, though that also reflects the pandemic-related slowdown. The institute also said the true value of investment is likely much higher since many investors do not publicly report deal values.

Other Chinese developers that have also been caught up in the Evergrande downdraft have played a much bigger role in North American real estate markets.

Greenland Holding Group, which is developing two major condo projects in downtown Toronto, is under pressure to refinance its debt. On Thursday, Moody’s Investors Service revised its outlook on Greenland to “negative” from “stable” and said the company will “face uncertainty in issuing new offshore bonds at reasonable funding costs to refinance its maturing debt over the next 6-12 months.”

Although the credit rater expects Greenland to have enough resources to repay its US$2.87-billion bonds that are maturing between September and December, 2022, it said the repayment will reduce funding for Greenland’s operations in the near term.

The company did not respond to a request for comment.

Greenland, like Evergrande, has crossed at least one of the “three red lines” that Chinese regulators put in place last year to cap borrowing to tamp down speculation. Companies that fail to comply with the limits, which govern metrics around asset, equity and debt levels, face restrictions on new borrowing.

In the U.S., Greenland, along with Oceanwide Holdings and China Vanke, which have also fallen short of Beijing’s new rules, are all struggling to develop projects in San Francisco, Los Angeles and New York.

Andy Yan, director of the city program at B.C.’s Simon Fraser University, said the nature of real estate finance means untangling the funding sources and relationships of heavily indebted Chinese developers is like trying to find “poisoned sausage meat” that’s mixed up in the global real estate marketplace.

If credit conditions worsen in China and lending continues to tighten, it is unclear if that will force developers in Canada that rely on money from China to pull back.

Thomas Davidoff, director of the UBC Centre for Urban Economics and Real Estate, said on the one hand a hit to wealth and liquidity in China could lead Chinese investors to retrench from a city like Vancouver. But with Chinese property developers in turmoil, “Chinese investors might want to relocate their investment of out China, possibly here.”

That mixed picture will take time to sort out.

David Ho, a Vancouver-based executive with real estate service CBRE, said some Chinese real estate developers in Canada sold their properties after Beijing imposed new rules in 2017 to keep capital in the country.

“There is an interest to entertain a sale,” Mr. Ho said. “They are making moves to liquidate or divest their interest, in some cases prematurely,” he said.

Mr. Ho leads a team in charge of bringing Asian capital to Vancouver, Toronto and other major North American cities. He said high-net-worth individuals in Hong Kong are now more open to investing in Canada. Ten years ago, he said his Hong Kong clients would tell him, “I can get an Evergrande bond with a 10-per-cent return so why would I invest in a shopping mall in Canada?” Now with Evergrande’s troubles and other turmoil in the Chinese economy, Mr. Ho is seeing more interest in Canadian real estate.

“We are doing deals,” he said.

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B.C. Children's Hospital reports troubling influx of kids with colds and flu – Vancouver Sun

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Health officials say a surge in respiratory syncytial virus is happening earlier than normal this year.

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B.C. Children’s Hospital reported Wednesday a spike in non-COVID-19 respiratory viral illnesses, such as colds and flus in children.

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That means the emergency room has been busier than normal and long waiting times can be expected.

Thirty per cent of all cases in the hospital’s emergency department in the past month have been children with respiratory illnesses, according to Dr. Claire Seaton, a pediatrician at B.C. Children’s Hospital.

Rates of severe infection caused by COVID-19 remains low and overall only two per cent of people hospitalized in B.C. are under the age of 19.

“That hasn’t changed but what has changed is we are seeing a lot of other viruses, including respiratory syncytial virus, and parainfluenza, along with some of the other common cold viruses.”

Respiratory syncytial virus, or RSV, is a common virus that causes infections of the lungs and respiratory tract, and most children have been infected with the virus by age two. RSV symptoms are mild in healthy children and adults but the virus can cause severe infection in young infants, especially those born prematurely, or young children who have heart of lung disease.

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Seaton said they didn’t see many children with colds or flus last year, so they are worried it’s going to get a lot busier in the emergency department because of the RSV surge.

It is not unusual to see a spike in cold and flu viruses after kids go back to school in September and October but this year the kids may have reduced immunity to these common illnesses because it just wasn’t around last year.

Public health measures such as wearing masks, keeping a physical distance, washing hands, and getting a flu vaccine can help to keep the kids safe, she said.

Part of the reason for the surge at B.C. Children’s may be because parents are worried their child has COVID-19 so they take them to the emergency room.

Seaton said if a child has a cough or the sniffles then it’s best to keep them home from school or take them to get a COVID test , but it’s not always necessary to go to the emergency room.

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“I think it’s important to realize that the viral surge has already increased hospitalization rates in other parts of Canada,” she said. “So the RSV surge, which normally happens in November, is happening earlier this year … and we are starting to see those cases here.”

If parents are worried about their child’s illness they can check symptoms on the B.C. Children’s Hospital website.

“For respiratory illness, you should take your baby or young child to an emergency department if they have trouble breathing, significant problems with breathing or lips that look blue, and if your baby can’t suck or drink or feed very well,” she said, adding infants younger than three months with a fever should also be brought in to the ER.

Doctors and health experts are recommending that children six months and older get a flu vaccine this year, especially because of the potential for reduced immunity.

“Last year, the rates for RSV infection were very low or basically non-existent so we have a whole year’s worth of children who did not get those viruses so their natural immunity is potentially lower,” she said.

ticrawford@postmedia.com


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Canada competition watchdog may have to rely more on litigation – top official

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 Competition Bureau Canada watchdog may have to rely more on litigation after its proposed veto of a takeover was overturned, and this could make life harder for companies seeking to merge, the agency head said on Wednesday.

Matthew Boswell, commissioner of competition, noted his bureau had tried this year to block western Canadian oil and gas waste firm Secure Energy Services Inc from buying rival Tervita Corp.

Secure then turned to the independent Competition Tribunal, which denied the bureau’s injunction and underscored “the high bar that needs to be met to prevent mergers … that we allege are anti-competitive,” he said.

The tribunal, he said, had acted so quickly that the bureau had not had time to present all its evidence, raising valid questions about the state of competition laws in Canada.

“This decision has significant implications for how we conduct future merger reviews, particularly in cases where there are competition concerns,” Boswell said in a speech to the Canadian Bar Association.

“This may mean that we must pursue a litigation-focused approach that is costly and less predictable for merging parties,” he added.

Secure relied on the so-called efficiencies defense, which is unique to Canada. Boswell said this procedure allowed the tribunal to allow an anti-competitive merger to proceed if the transaction was deemed to produce efficiency gains that were greater than its anti-competitive effects.

“The efficiencies defense raises significant practical

challenges for the Bureau to estimate and measure anti-competitive harm,” he said. “(We should) ask ourselves whether our competition laws are really working in the best interest of all Canadians.”

The bureau is an independent law enforcement agency set up to ensure fair competition. It investigates price fixing, bid-rigging and mergers, among other matters.

 

(Reporting by David Ljunggren; Editing by Cynthia Osterman)

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Canadian home price growth slows to near standstill in September

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Canadian home prices barely rose in September from August as a recent slowdown in housing sales weighed, data showed on Wednesday.

The Teranet-National Bank Composite House Price Index, which tracks repeat sales of single-family homes in 11 major Canadian markets, rose 0.1% in September from August, marking the fourth consecutive month in which the monthly price increase was lower than the previous month.

“The slowdown in price growth can be linked to the slowdown in housing sales reported in recent months by the Canadian Real Estate Association,” Daren King, an economist at National Bank of Canada, said in a statement.

Eight of the 11 major markets rose, led by a 1% gain for Winnipeg, while prices were stable in Montreal and fell in Vancouver as well as in Ottawa-Gatineau. It was the first time in seven months that gains were not seen in all 11 regions.

On an annual basis, the index was up 17.3%, decelerating after it notched record annual growth in August. It was paced by a 31.7% gain in Halifax and a 28.0% gain in Hamilton.

 

(Reporting by Fergal Smith; Editing by Steve Orlofsky)

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