Chinese regulators have warned lenders to avoid any actions that could raise the country’s biggest property company’s capital risk as it has become overvalued.
Authorities are weighing a capital injection into troubled property developer Evergrande Real Estate Group (3333.HK), the Wall Street Journal reported on Sunday. Evergrande is around 20% over its book value, according to the Bloomberg Media Index, which is more than twice as high as peers Evergrande Villas (3333.SG) and Greenland Holdings (3333.HK) which are around 10% over their book value. Evergrande’s debt increased to 236.55 billion yuan ($36.42 billion) in the first half of this year, from 197.55 billion yuan at the end of December 2016.
The local regulator, the National Development and Reform Commission (NDRC), warned banks to avoid any financing moves that might push Evergrande’s capital risk, the Wall Street Journal reported. Evergrande’s shares fell 19% in early Monday trading.
At Friday’s close, Evergrande shares were valued at 596.1 billion yuan, representing a market capitalization that was 74% higher than its total revenue in the first half. The company said its profit rose 14% to 1.7 billion yuan ($246.79 million) from a year earlier.
Last month, chairman Hui Ka Yan stepped down and the company’s largest shareholder began promoting an accounting investigation.
“I am no longer fully confident about the overall future of this company,” Hui said in a statement. “After the situation develops further, I will make a public announcement on further changes in my position.”
Other firms with a $1 billion market capitalization or more will undergo a Chinese government review as part of its efforts to “guide the market toward greater discipline,” the regulator said last month. Property and banking companies will also be scrutinized under the review of the “capital sensitivity ratio,” which aims to ensure each company’s capital needs and exposures are balanced.
Prime Minister Li Keqiang said during a visit to Hong Kong in July that there is no reason for speculators to place too much bet on property and take too many chances.
The government has been trying to cool the country’s red-hot housing market, which is expected to hit 7,500 yuan per square meter this year, a 15-year record. Beijing is the only city in China where house prices are still surging even though it has experienced a five-year boom in the property market.
Many analysts believe that Beijing is applying relatively mild measures to reduce the real estate bubbles rather than putting a cap on prices for fear of propping up price bubbles in other cities.
Bloomberg contributed to this article.