How Canada is exposed to the ripple effects of the Evergrande debt crisis

Fairmont Le Chateau Montebello is seen in Montebello, Quebec on Thursday, September 23, 2021.Justin Tang / The Globe and Mail

Canada’s largest pension funds and banks have limited direct links to the Evergrande Group debt crisis, according to a review of their investment holdings, but there is no doubt that the Chinese company’s collapse would have painful ripple effects, although these indirect reverberations are difficult to quantify.

It would be “naive to think that market turbulence does not have the potential to have a second and third order impact,” Noel Quinn, managing director of HSBC Holdings PLC, told a conference on Wednesday. “Obviously, with the changes taking place in the Evergrande situation, this is concerning. “

Also on Wednesday, after Evergrande’s inability to pay interest caused global markets to tumble, the company struck a deal with domestic bondholders that appeared to allay investor concerns over contagion. Meanwhile, China’s central bank injected US $ 18.5 billion in liquidity into the banking system, which brought some calm.

According to a research note by Sohrab Movahedi of BMO Nesbitt Burns Inc.

Banks could be indirectly exposed to counterparty risk in the capital or equity markets through wealth management, “but we believe they are insignificant to the banks’ balance sheet and / or earnings profile,” he said. -he writes.

Life insurers have no direct exposure to Evergrande debt or real estate and the risk of contagion is limited, Movahedi said. Investments in China represent only about 10 percent of the $ 1.9 billion in fund assets invested by Manulife Financial Corporation in Asia, for example.

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Some pension funds, such as the Canada Pension Plan Investment Board and the Caisse de dépôt et placement du Québec, have small stakes in Evergrande and other Chinese real estate companies such as China Vanke Co. Ltd. at Evergrande were required to meet index funds.

A subsidiary of the Royal Bank of Canada, UK firm 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 exposure negligible as of July 31, based on Refinitiv data.

An RBC spokesperson declined to comment on certain fund holdings.

With Evergrande having to pay $ 305 billion to banks, homebuyers and suppliers, the majority of which are in China, the company has been scrambling in recent weeks to offload assets in order to raise funds.

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

Much of it is now on the block, which begs the question of how long it will be before Evergrande sells a listing in its only Canadian holding, the Fairmont Le Château Montebello.

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

With Evergrande now running into debt beneath its leverage, shaking global markets this week with fears its collapse could trigger a global credit crunch, it’s no small measure of relief that the real estate giant Canada has come no further than owning the world’s largest log cabin.

Guests arrive through the entrance arch leading to the Fairmont Le Chateau Montebello in Montebello, Quebec on September 23, 2021. The chateau is the only Canadian holding company of Evergrande Group.Justin Tang / The Globe and Mail

Geneviève Dumas, general manager of Chateau Montebello, said she had no knowledge of what Evergrande’s plans might be for the hotel and asked questions of company officials in China. Evergrande did not respond to a request for comment.

Several hotel industry observers said they had not heard of any decision to sell the Fairmont property. They also said new investment in Canadian industry from China was scarce.

“We haven’t seen any significant inflows from China and have actually seen some repatriation,” said Alam Pirani, executive general manager of the hotel division of Colliers.

There is also some evidence that Chinese investors were already reducing their exposure to Canada.

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

Last year, Chinese investment and purchases in Canada totaled $ 1.98 billion, up from $ 4.05 billion in 2019, according to the institute, which tracks all Chinese investment in Canada, although this reflects also the slowdown linked to the pandemic. The institute also said that the real value of the investment is likely to be much higher, as many investors do not publicly report the values ​​of transactions.

Other Chinese developers who have also been caught in the downdraft of Evergrande have played a much larger role in North American real estate markets.

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

Although the credit assessor expects Greenland to have sufficient resources to repay its $ 2.87 billion bonds which fall due between September and December 2022, he said the repayment will reduce funding. short-term Greenland operations.

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 in order to curb speculation. Firms that breach the limits, which govern measures regarding levels of assets, equity and debt, face restrictions on new borrowing.

In the United States, Greenland, as well as Oceanwide Holdings and China Vanke, which also failed to respect Beijing’s new rules, are all struggling to develop projects in San Francisco, Los Angeles and New York.

Andy Yan, director of the municipal program at Simon Fraser University in British Columbia, said the nature of real estate finance means that disentangling the sources of finance and the relationships of heavily indebted Chinese developers is like trying to find “poisonous sausage meat” that gets mixed up in the real world. estate market.

If credit conditions worsen in China and lending continues to tighten, it is not certain that this will force Canadian developers who depend on Chinese money to pull out.

Thomas Davidoff, director of UBC’s Center for Urban Economics and Real Estate, said on the one hand, a blow to China’s wealth and liquidity could lead Chinese investors to pull out of a city ​​like Vancouver. But with Chinese real estate developers in turmoil, “Chinese investors might want to relocate their investment out of China, maybe here.”

This 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 in making a sale,” Mr. Ho said. “They are taking steps to liquidate or dispose of their stake, in some cases prematurely,” he said.

Mr. Ho leads a team responsible for 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 clients in Hong Kong would tell him, “I can get an Evergrande bond with a 10% yield, so why would I invest in a mall in Canada?” Now, with Evergrande’s troubles and other turmoil in the Chinese economy, Mr. Ho is seeing increased interest in Canadian real estate.

“We are doing business,” he said.

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Robert P. Matthews