On the outskirts of Beijing, a banker smartly dressed in black slacks and white-collared shirt stands guard in front of an Evergrande residential development as trucks carrying tonnes of cement rumble by.
Construction at Evergrande Royal Peak — one of hundreds of projects in China involving the world’s most indebted real estate developer — was halted in July as a liquidity crisis at the group hampered its ability to pay contractors and suppliers.
But work resumed early this month, according to people at the site, even as the group’s plight and expectations of an imminent default sparked a global reckoning over the health of China’s vast property sector, an industry that underpins the country’s wider economic model.
“I’m here to watch that work is going on [and] make sure the workers haven’t left,” said the banker from Shanghai Pudong Development Bank, who declined to give his name. Tasked with monitoring the site every day, he added that the bank had lent against the project in June.
Other Evergrande creditors have much less clarity on what exactly is going on inside a company that rocked international markets late last month after failing to make a payment on an offshore bond, only to narrowly avoid default by transferring the funds last weekend before a 30-day grace period expired.
Another last-minute payment on a separate bond was reportedly made yesterday, with two bondholders telling the Financial Times today that fellow creditors had confirmed receipt. Evergrande did not immediately respond for a request for comment. Other deadlines loom in the coming months.
But international markets, where investors have ploughed about $20bn into a company with more than $300bn of liabilities as of June, remain in the dark about many aspects of the situation, despite advisers complaining weeks ago of a lack of “meaningful engagement” from the developer.
Evergrande has yet to provide any official disclosure on its bond payments. The transfer last week was initially reported in state media and subsequently confirmed by the FT.
Adding to the uncertainty is the Chinese government, which has downplayed the risks of Evergrande without clarifying its role in resolving the problem. Yet Beijing is believed to be deeply involved in the fate of the company that has come to embody the struggle of China’s property sector to deleverage, and which has taken customers’ prepayment for flats that have yet to be delivered.
“This is going to be very opaque — no one’s going to be telling the offshore bondholders what the position is in China,” said one person involved in the Evergrande situation, adding the “black box” nature of the process and lack of transparency was “absolutely standard” in the country.
At the residential development in Beijing, where cranes swing back and forth against the whirr of drills, construction is being run by CRCC, a state-owned rail company. A subcontractor, who oversees a team of 50 workers, said he resumed work after being told he would be paid through a deposit that Evergrande had placed with the government. “But we haven’t seen any money, they keep delaying,” he said.
He was resigned to working without being paid until the Spring Festival, a public holiday, next February. “They told us . . . that the government had taken over responsibility for the project — that it’s a people’s project,” he said. “If it’s the government doing it, you have to keep working.”
Projects like Evergrande Royal Peak are the lifeblood of the company and crucial for investors within and beyond China. If Evergrande can continue to build and sell new homes, it can generate cash to repay its debts. But in late August, the company initially warned markets through its interim results that work at some of its projects had been suspended.
On Sunday, after the last-minute bond payment, the group said on its WeChat social media account that work at nine projects had resumed. In Hong Kong, work is continuing at one of its sites, though a prominent sign on the building that previously displayed its name has been covered up. But the overall status of its 778 projects across more than 200 cities is unclear.
“There is little disclosure on the status and progress of Evergrande’s projects,” said Luther Chai, an analyst at CreditSights. “Site visits have been made difficult with Covid-19 border restrictions.”
But, Chai suggested, given the number of unfinished projects “it is in the government’s interest to protect homebuyers first, by ensuring that Evergrande prioritises project completion, in order to prevent large scale social unrest”.
The person involved in the situation said there was speculation that “there are representatives of the government taking control of projects at the moment”. Some local authorities in September seized control of customers’ presales money, while in July news of a project being halted in the city of Shaoyang dealt a significant blow to investor sentiment towards Evergrande.
For offshore bondholders, which recently included big investors such as BlackRock and UBS, there are uncertainties around any potential claim on the real estate projects at the core of Evergrande’s business model even in the event of an official default, which many still expect.
The person added there was a lack of clarity over what money raised in offshore bond markets was used for and whether, after passing through Evergrande subsidiaries, it ended up as debt or equity in specific projects on the Chinese mainland.
“Everyone wants to hope it’s just passed through as debt,” the person said, adding that if the money was used instead for equity financing, it would have a weaker claim in any restructuring process. “I don’t think anyone knows yet.”
Meanwhile, even if all of the group’s projects are completed, other analysts suggest the company’s timeline of looming debt repayments will still be difficult to meet without other asset sales.
Evergrande has missed interest payments but has not yet faced the principal payment on a maturing bond outside of China. It has, however, extended maturities on a bond issued by a company called Jumbo Fortune Enterprises that it guaranteed, according to media reports. The company did not immediately respond to a request for comment.
“We don’t really have a lot of time,” said Matthew Chow, an analyst at S&P, pointing to debts coming due in March and April. “I think the best case is still . . . hinging on whether the company can sell some assets.”
As of the end of June, Evergrande had $36bn of borrowings and $91bn of trade payables due in the next year — well over a third of its total liabilities — compared to $14bn of cash.
In the absence of any official explanation, theories abound as to why Evergrande made the last-minute bond payment last week rather than defaulting and entering restructuring talks. One is that the company is buying time to sell assets offshore to deal with creditors and other claims onshore, though an attempt to sell a stake in its property services unit fell through last week.
Another is that its billionaire chair Hui Ka Yan is under government pressure to avoid a default and is even using his own personal resources to do so. According to Hong Kong land documents, a mortgage was recently secured on a property Hui bought through a shell company in 2009.
Back on the outskirts of Beijing, one worker says he is not worried about Evergrande failing because “the government won’t let it happen”.
Nearby, a poster displays a blown-up photo of Hui from a report in state-owned newspaper People’s Daily. The image shows China’s former richest man at Tiananmen Square, attending the Communist party’s 100th anniversary in June, with a nervous smile on his face.
Additional reporting by Wang Xueqiao in Shanghai and Joe Rennison in New York