Canada’s largest pension funds and banks are directly related to the Evergrande Group’s debt crisis, a review of their investment holdings shows, but there is no doubt that the collapse of the Chinese company will have a painful knock-on effect, even if those indirect Recombinations are difficult to measure.
“It would be nave to think that market volatility does not have the potential for second-order and third-order effects,” Noel Quinn, chief executive officer of HSBC Holdings Plc, told a conference call on Wednesday. “Obviously with the changes taking place in the Evergrande situation, it correlates.”
Also on Wednesday, as global markets plunged after Evergrande’s inability to meet interest payments, the company struck a deal with domestic bond holders that appeared to ease investor concerns about the transition. Meanwhile, China’s central bank injected US$18.5 billion of liquidity into the banking system, bringing more peace.
Canadian banks have no direct loans to Evergrande or China’s real estate sector, and the Big Six banks hold less than 1 percent of their equity capital — about $1.4 billion combined — in legal entities in China, a research notes. According to Sohrab Movahedi of BMO Nesbit Burns Inc.
Banks may take indirect exposure to counterparty risk in capital markets or equity markets through wealth management, “but we estimate these to be insignificant to banks’ balance sheets and/or income profiles,” they wrote.
Life insurers have no direct exposure to Evergrande’s loans or real estate and the risk from infection is limited, Movahedi said. For example, investments in China account for only 10 percent of Manulife Financial Corp’s $1.9 billion in invested fund assets.
What’s Behind Evergrande’s Debt Struggle and Why It’s Plaguing Investors Around the World
China’s Evergrande is spreading filth and harming big mining companies. The iron ore and steel party is over
Some pension funds such as the Canadian Pension Plan Investment Board and the Cais de Depot et Placement du Québec hold small equity stakes in Evergrande and in other Chinese real estate companies such as China Vanque Company Limited, but some holdings are with Canadian asset managers. Evergrande had a need for index funds to satisfy.
British-based BlueBay Asset Management, a subsidiary of Royal Bank of Canada, held a small number of tens of millions of dollars worth of bonds issued by Evergrande, but sold some of those bonds this year and has until July 31. is of no importance. 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, most of which is in China, the company has been scrambling in recent weeks to offload assets to raise cash.
In addition to managing 565 million square meters of land in nearly 300 cities across mainland China and Hong Kong, Evergrande has a vast array of industries, from bottled water to electric vehicles, according to its latest annual report.
Much of it is now on the block, which begs the question of how long it will take before Evergrande signs up for sale at its lone Canadian holding, Fairmont Le Château Montebello.
Evergrande closed the historic hotel two hours west of Montreal in 2014, its first foray into Canada, leading many to wonder whether China’s second-largest developer is going to reshape this country’s largest cities. was about to join the influx of other Chinese real estate companies.
Evergrande now burdened by its debt, with global markets bustling this week on fears its collapse could touch the global debt crisis, it’s no small measure of relief that the property giant Canada is the world’s biggest asset giant. Didn’t go any further than owning a log cabin.
Genevieve Dumas, general manager of Chateau Montebello, said he had no idea what Evergrande’s plans for the hotel might be, and asked questions from company representatives in China. Evergrande did not respond to a request for comment.
Several hotel industry watchers said they had not heard of any move to sell the Fairmont property. He also noted that new investment from China in Canadian industry is rare.
“We haven’t seen any meaningful inbound capital from China and have actually seen some repatriation,” said Alam Pirani, executive managing director of Colliers’ hotels division.
There are also some indications that Chinese investors were already reducing their investments in Canada.
Jia Wang, interim director of the China Institute at the University of Alberta, said Chinese investment in Canada was waning even before the Evergrande crisis and before Beijing tried to discourage property developers from borrowing too much.
Last year, Chinese investments and purchases in Canada totaled $1.98 billion, down from $4.05-billion in 2019, according to the institute, which tracks all Chinese investment in Canada, although it also reflects a slowdown related to the pandemic. Is. The institute also said that the true value of the investment is likely to be very high as many investors do not publicly report the value of the deal.
Other Chinese developers who have been caught in the Evergrande downdraft have played a huge role in the 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 from “stable” to “negative” and said the company will “issue new offshore bonds at reasonable financing costs to refinance its maturing debt over the next 6-12 months.” I will face uncertainty.”
Although Credit Rater expects Greenland to have sufficient resources to repay its US$2.87 billion in bonds maturing between September and December 2022, it said the repayment will help fund Greenland’s operations in the near term. will decrease.
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 borrow to quell speculation. Companies that fail to adhere to the limits governing metrics around assets, equity and debt levels face sanctions on fresh borrowing.
In the US, 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’s program at B.C.’s Simon Fraser University, said the nature of real estate finance means opening up ties to sources of funding and heavily indebted Chinese developers trying to find the “poisonous sausage meat” that is causing global warming. In reality the property market is mixed.
If the credit situation in China worsens and lending continues, it is unclear whether this will compel developers in Canada who rely on money from China.
Thomas Davidoff, director of the UBC Center for Urban Economics and Real Estate, said a hit to wealth and liquidity in China on the one hand could prompt Chinese investors to withdraw from a city like Vancouver. But with the turmoil among Chinese property developers, “Chinese investors will likely want to move their investments from China here.”
It will take time to settle that mixed picture.
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 interest in entertaining the sale,” said Mr. Ho. “They are taking steps to prematurely liquidate or sell their interests in some cases,” he said.
Mr. Ho leads the team in charge of bringing the Asian capital to Vancouver, Toronto and other major North American cities. He added that high-net-worth individuals in Hong Kong are now more open to investing in Canada. Ten years ago, he said that his Hong Kong clients would tell him, “I can get an Evergrande bond with a 10 percent 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’re making deals,” he said.
Your time is valuable. Get the Top Business Headlines newsletter conveniently delivered to your inbox early morning or evening. .