Real Estate

China’s central bank says spillover from Evergrande crisis ‘controllable’

A People’s Bank of China official has said the spillover of a crisis at Evergrande on the financial system was “controllable”, in the central bank’s first official comments on the world’s most indebted developer since it missed international bond payments last month.

The statement came as the company faces increasing scrutiny from regulators ahead of a potential default next week, with Hong Kong’s audit watchdog announcing a probe into PwC’s most recent audit of its accounts.

Zou Lan, an official at the PBoC, told reporters at a press conference on Friday evening that the Evergrande situation was being resolved by local governments and authorities through “market and rule of law principles”, according to state media.

The comments represent a significant intervention from Beijing after Evergrande sparked volatility across global markets when it missed an interest payment due on September 23 on one of its dollar-denominated bonds, triggering a 30-day grace period.

The company’s rapidly unfolding liquidity crisis has shown signs of spreading across China’s real estate development sector, where the number of defaults is growing, raising concerns over possible fallout for China’s wider economy.

Last week developer Fantasia defaulted on a $206m bond, while Sinic Holdings said a default would “likely occur” regarding a payment due on Monday. Offshore yields on China’s riskier corporate borrowers have hit their highest level since 2009.

Lan said Evergrande had been “poorly managed” and “failed to operate cautiously”, but that the real estate industry more broadly was healthy.

The Chinese developer missed further interest payments on its offshore bonds due on Monday, while advisers to bondholders in Evergrande said last Friday that they had had no “meaningful engagement” from the company.

Separately on Friday, Hong Kong’s Financial Reporting Council said it had identified “questions about the adequacy of reporting on going concern” in Evergrande’s financial statements for the 2020 financial year and the six months to the end of June 2021. It also said it would investigate whether PwC’s 2020 audit “complied with the applicable auditing standards”.

PwC signed off Evergrande’s 2020 accounts as a going concern, an accounting term that shows a company has the resources to continue operating for at least 12 months.

However, the company said in its interim financial statements for the first half of this year, released in late August, that it risked defaulting on its debt, weeks before it started missing interest payments on international bonds.

The FRC said in a statement that while Evergrande admitted it had liquidity issues and some of its property construction had been suspended due to overdue bills, it “made no explicit statement” as to whether “material going concern uncertainties existed” in the interim report as well as its 2020 annual report released earlier in the year.

PwC, which audits the company from Hong Kong, has received $42m in fees from Evergrande since 2009. PwC has declined to comment on its audits of the company. It did not immediately respond to the FRC’s statement.

Nigel Stevenson, an analyst at GMT Research that has for years criticised PwC’s audits of the company, said in the wake of the FRC announcement that the firm “is likely to come under increasing scrutiny on their role and what they knew, when” about Evergrande.

“There have been quite a lot of questions raised about Evergrande for a decade or more,” Stevenson said. “If there has been lax scrutiny there really is no excuse for it.”

Evergrande did not immediately respond to a request for comment.


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