Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

China Evergrande's rising default risks shift focus to possible Beijing rescue

Stock MarketsSep 21, 2021 02:37PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
2/2 © Reuters. FILE PHOTO: The China Evergrande Centre building sign is seen in Hong Kong, China. August 25, 2021. REUTERS/Tyrone Siu/File Photo 2/2

By Clare Jim, Anshuman Daga and Kane Wu

HONG KONG/NEW YORK (Reuters) - Persistent default fears eclipsed efforts by China Evergrande Group's chairman to lift confidence in the embattled firm on Tuesday, as Beijing showed no signs it would intervene to stem any domino effects across the global economy.

Analysts played down the threat of Evergrande's troubles becoming the country's "Lehman moment," though concerns about the spillover risks of a messy collapse of what was once China's top-selling property developer have roiled markets.

In an effort to revive battered confidence in the firm, Evergrande Chairman Hui Ka Yuan said in a letter to staff the company is confident it will "walk out of its darkest moment" and deliver property projects as pledged.

In the letter, coinciding with China's mid-autumn festival, the chairman of the debt-laden property developer, also said Evergrande will fulfil responsibilities to property buyers, investors, partners and financial institutions.

"I firmly believe that with your concerted effort and hard work, Evergrande will walk out of its darkest moment, resume full-scale constructions as soon as possible," said Hui, without elaborating how the company could achieve these objectives.

Investors in Evergrande, however, remained on edge.

Its shares fell as much as 7%, having tumbled 10% in the previous day, on fears its $305 billion in debt could trigger widespread losses in China's financial system in the event of a collapse. The stock ended down 0.4%.

Other property stocks such as Sunac, China's No. 4 developer, and state-backed Greentown China on Tuesday recouped some of their hefty losses in the previous session. The Hong Kong property sector index rose nearly 3%.

"We are uncertain of how far and how strong the ripple effect would be on the housing market and the developer industry,” analysts at Deutsche Bank (DE:DBKGn) said in a recent note. “We think investors should remain on the sideline until there is more clarity.”

Fund giant BlackRock (NYSE:BLK) and investment banks HSBC and UBS have been among the largest buyers of Evergrande’s debt, Morningstar data showed.

BlackRock added 31.3 million notes of Evergrande's debt between January and August 2021, while HSBC increased its position by 40% through July, according to Morningstar. UBS increased its position by 25% through May, the latest date available in the fund tracker's database showed.

The Chinese government has been largely quiet on the crisis at Evergrande in recent weeks.

"There must be negotiations behind the scenes about a systemic recapitalization (of Evergrande) by state proxies," said Andrew Collier, managing director of Hong Kong-based Orient Capital Research.

"If one piece of Evergrande's debt is allowed to default, it would trigger questions about all of their remaining debt from investors and the government doesn't want a wider crisis like that," he said.

World stocks stabilised somewhat on Tuesday and oil prices recovered from the previous day's heavy selling, as investors grew more confident that contagion from the distress of Evergrande would be limited.

Hedge fund managers contacted by Reuters said they were not yet concerned about any contagion risk into other equities markets.

“From our perspective, we … do not see any potential fundamental long-term effects on our portfolio companies,” said one London-based hedge fund professional. However, “there could likely be a lot of volatility around this one in the short term.”

A default by Evergrande has been widely anticipated by some corners of the market.

"I would characterize Evergrande as a telegraphed and controlled detonation," said Samy Muaddi, the portfolio manager of the $5.1 billion T. Rowe Price Emerging Markets Bond fund, who does not have a position in the company. "If an investor was still investing in Evergrande they were investing against Chinese policy makers, which is a good way to lose."

However, the spillover concerns at least in the property sector remained. S&P Global (NYSE:SPGI) Ratings downgraded Sinic Holdings to 'CCC+' on Tuesday, citing the Chinese developer's failure "to communicate a clear repayment plan".

Hong Kong-listed shares of small-sized Chinese developer Sinic plunged 87% on Monday, wiping $1.5 billion off its market value before trading was suspended.

A major test for Evergrande comes this week, with the firm due to pay $83.5 million in interest relating to its March 2022 bond on Thursday. It has another $47.5 million payment due on Sept. 29 for March 2024 notes.

Both bonds would default if Evergrande fails to settle the interest within 30 days of the scheduled payment dates.

"I think (Evergrande's) equity will be wiped out, the debt looks like it is in trouble and the Chinese government is going to break up this company," said Andrew Left, founder of Citron Research and one of the world’s best known short-sellers.

"But I don't think that this is going to be the straw that breaks the global economy's back," said Left, who in June 2012 published a report that said Evergrande was insolvent and had defrauded investors.

Evergrande missed interest payments due Monday to at least two of its largest bank creditors, Bloomberg reported on Tuesday, citing people familiar with the matter.

SPILLOVER RISKS

The Chinese government will help Evergrande at least get some capital, but it may have to sell some stakes to a third party, such as a state-owned enterprise, Dutch bank ING said in a research note.

"The spin-off of non-core businesses, for example, those that are not residential real estate type businesses, will probably be done first," wrote Iris Pang, ING's Chief Economist, Greater China.

"After that could come sales of stakes that are at the core of Evergrande's business," Pang said.

Citi analysts in a research note said that regulators may "buy time to digest" Evergrande's non-performing loan problem by guiding banks not to withdraw credit and extend the interest payment deadline.

Still, Citi said that while Evergrande's default crunch was a potential systemic risk to China's financial system, it was not shaping up as "China's Lehman moment."

At the same time, the U.S. market is in a better position to absorb a potential global shock from a major company default compared with the years prior to the 2007-2009 financial crisis, Securities and Exchange Commission (SEC) chair Gary Gensler said on Tuesday.

In any default scenario, Evergrande, teetering between a messy meltdown, a managed collapse or the less likely prospect of a bailout by Beijing, will need to restructure the bonds, but analysts expect a low recovery ratio for investors.

S&P Global Ratings said in a report on Monday it does not expect Beijing to provide any direct support to Evergrande.

"We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy," the rating agency said.

"Evergrande failing alone would unlikely result in such a scenario," S&P said.

China Evergrande's rising default risks shift focus to possible Beijing rescue
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (7)
Rajesh Tayal
Rajesh Tayal Sep 21, 2021 1:41PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
To *******with 305b default , China didn't step in with 3T wash out in last 2 months in much bigger tech & retail bigges..
Sean Livingstone
Sean Livingstone Sep 21, 2021 9:21AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
You guys are funny. Ccp imposing regulations just to address these issues. You guys say anti capitalism. Now, the scam is out, and you still don't like.. I thjnk you guys aew just anti Chinese no matter what.
Joe Zhang
Joe Zhang Sep 21, 2021 9:21AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
one step closer to world ***
Jason Kim
Jason Kim Sep 21, 2021 9:21AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Investing Man  Since the founding of the United States, no country has invaded and killed more people than the United States. I can have a nucleus, but you can't. I oppress the Native Americans, but you must not oppress the Uyghurs.
Kaveh Sun
Kaveh Sun Sep 21, 2021 9:17AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
It is just Another chinese scam
Vi Ma
Vi Ma Sep 21, 2021 3:53AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
And yes, China has to and should fall. The CCP have branded Chinese has Public Enemy # 1 to the entire world , like Pakistan is bcoz of ISI for Terrorism and N.Korea a rouge nation bcoz of Kim & Sister.
Vi Ma
Vi Ma Sep 21, 2021 3:50AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
CCP for a change is doing the right thing, but does not suite the capitalist journalists and magazines hence being criticized for doing the right thing for once in their life !! Western Capitalism , led by US, has put the wealth in the hands of the smartest few !! But that's the law of the Jungle where the strongest survives, not of civilized societies in current day and age !! Taxation can be made stringent across such that every corporate and millionaire pays their due share but lobbies pay a fraction of that money to lawmakers in each country from framing such policies, citing them as Anti Capitalistic or Anti Risk ...... my foot !!
John Hat
John Hat Sep 20, 2021 11:45PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
China will fall. Can't wait. A mirage of strength set to fade into history.
Matt Brackley
Matt Brackley Sep 20, 2021 8:49PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
it's not a problem? ya I wasn't worried until I heard that. looking back at all Lefts short hits in the past 10 years...I think timing was his issue on all...he was right on Shopify too.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email