China’s evergrande default risk shifts focus to Beijing’s bailout potential

Hong Kong / New York — As Beijing showed no signs of intervening to stop the domino effect on Tuesday, concerns about defaults persist on Tuesday, overturning efforts by the Evergrande Group chairman to build confidence in embarrassed companies.

Analysts threaten that the Evergrande problem will become the country’s “Lehman moment”, despite concerns about the spillover risk of a messy collapse, once China’s best-selling real estate developer has devastated the market. I neglected it.

In a letter to staff, Evergrande Chairman Hui Ka Yuan is confident that the company will “get out of the darkest moments” and deliver real estate projects as promised, in order to regain the credibility that has hit the company. He said he was.

In a letter, Evergrande said it would take responsibility for real estate buyers, investors, partners and financial institutions in time for the Mid-Autumn Festival in China, the chairman of a debt-bearing real estate developer.

“With your united efforts and efforts, we are confident that Evergrande will get out of the darkest moments and resume full-scale construction as soon as possible,” Hui said, how the company can achieve these goals. I mentioned without explaining in detail.

However, investors in Evergrande still have the upper hand.

The company’s stock price fell 7%, down 10% the day before. This was due to concerns that a collapse of $ 305 billion in debt could result in widespread losses to China’s financial system. Stock prices fell 0.4%.

Other real estate stocks such as Sunac on Tuesday, China’s fourth developer, and state-backed Greentown China have regained some of the hefty losses in the previous session. Hong Kong’s real estate sector index rose nearly 3%.

“It’s unclear how strong and spillover the housing and developer industries will be,” a Deutsche Bank analyst said in a recent note. “Investors should stay on the sidelines until it becomes clearer.”

Fund giants BlackRock and investment banks HSBC and UBS were the largest buyers of Evergrande’s debt, according to Morningstar data.

According to Morningstar, BlackRock added 31.3 million notes of Evergrande debt between January and August 2021, and HSBC increased its position by 40 percent until July. UBS increased its position by 25% until May, as indicated by the latest date available in the fund tracker database.

The Chinese administration has been largely silent about the Evergrande crisis in recent weeks.

Andrew Collier, Managing Director of Orient Capital Research, based in Hong Kong, said:

“If some of Evergrande’s debt is allowed to default, it raises questions from investors about all the remaining debt, and the government does not want such a broader crisis.” He said.

Global stocks were somewhat stable on Tuesday, and investors were more confident that transmission from the suffering of Evergrande would be limited, allowing oil prices to recover from the previous day’s mass sales.

Hedge fund managers contacted by Reuters said they were not yet concerned about the risk of infecting other stock markets.

“From our point of view, there is no potential fundamental long-term impact on portfolio companies,” said one London-based hedge fund expert. However, “in the short term, there can be a lot of volatility around this.”

Defaults by Evergrande are widely expected in some corners of the market.

“I characterize Evergrande as a telegraph and controlled explosion,” said Samy Muaddi, portfolio manager for the $ 5.1 billion T. Rowe Price Emerging Markets Bond fund. “If investors were still investing in Evergrande, they were investing in Chinese policy makers. This is a good way to lose.”

However, there remained concerns about spillover, at least in the real estate sector. S & P Global Ratings downgraded Sinic Holdings to “CCC +” on Tuesday. This is because Chinese developers “couldn’t communicate a clear repayment plan.”

China’s small developer Cynic’s Hong Kong-listed stock plunged 87% on Monday, clearing $ 1.5 billion from market value before trading was suspended.

Evergrande’s major test will take place this week and the company will pay $ 83.5 million in interest on Thursday’s March 2022 bond. For the March 2024 note, an additional $ 47.5 million will be required to be paid on September 29th.

If Evergrande fails to settle interest within 30 days of the scheduled payment date, both bonds will default.

Andrew Left, founder of Citron Research and one of the most well-known short-term companies in the world, said: seller.

“But I don’t think this will be a straw to break the recession of the global economy,” said Left, who released a report saying that Evergrande went bankrupt in June 2012 and deceived investors.

Ripple risk

The Chinese administration will help Evergrande get at least some capital, but it may have to sell some shares to third parties like state-owned enterprises, Dutch bank ING said in a study note. I said in.

Iris Pang, Chief Economist at ING in Greater China, said:

“Then, there could be a sale of the core shares of Evergrande’s business,” said Pang.

Citi analysts could “spend time” on Evergrande’s bad debt problem by instructing regulators not to withdraw credit and extend interest payment deadlines Said there is.

Still, Citi said the Evergrande default crisis was a potential systemic risk to China’s financial system, but it was not shaped as a “China’s Lehman moment.”

At the same time, the Securities and Exchange Commission said the US market is in a better position to absorb the potential global shock of major corporate defaults compared to the year before the 2007-2009 financial crisis. (SEC) Chairman Gary Gensler said Tuesday. ..

Evergrande wobbles between messy meltdowns, controlled collapses, or unlikely Beijing bailouts in either default scenario, bonds need to be restructured, but analysts are investors Expected to have a low recovery rate.

S & P Global Ratings said in a Monday report that it did not expect Beijing to provide evergrande direct support.

“Beijing believes that it will only be forced to intervene if there is widespread transmission and multiple major developers fail and pose systemic risk to the economy,” the rating agency said.

“If Evergrande fails on its own, it is unlikely that such a scenario will occur,” says S & P.

Claire Jim, Enchemin Daga, Kane Wu



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