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.
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.
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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