Why global markets are rattled by Chinese builder’s financial woes
Evergrande to make domestic bond coupon payment, soothing fears
Beijing: Global investors are watching nervously as one of China’s biggest real estate developers struggles to avoid defaulting on tens of billions of dollars of debt, fueling fears of possible wider shock waves for the financial system.
The government ``doesn’t want to be seen as engineering a bail out’’ but is likely to organize a debt restructuring to ``reduce systemic risk and contain economic disruption,’’ Tommy Wu of Oxford Economics said in a report.
Evergrande is the biggest casualty yet from the ruling Communist Party’s effort to rein in surging debt levels.
A look at Evergrande and anxiety about its debt troubles:
Hengda Real Estate Group said in a statement it would make the coupon payment on its Shenzhen-traded 5.8% September 2025 bond on time on Sept. 23.
The announcement comes as Evergrande, once the country's top-selling developer, inches closer to a key deadline for an interest payment on a dollar bond, with financial markets tense even as investors and analysts played down the threat of its troubles becoming the country's "Lehman moment." Hengda Real Estate's coupon payment totals 232 million yuan ($35.88 million), according to Refinitiv data.
"We are still trying to understand what this payment means for the other bonds but I imagine they would want to stabilise the market and make other coupon payments, given the close scrutiny," said a source familiar with the situation who declined to be identified as they are not authorised to speak to the media.
U.S. stock futures, the yuan and the risk-sensitive Australian dollar rose, while safe-haven assets such as the yen and U.S. Treasuries slipped.
Evergrande is set to make its onshore bond payment on time, but the developer has not indicated whether it will be able to pay $83.5 million in interest due on 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.
Trade in Evergrande's onshore exchange-traded bonds has been halted since Sept. 16, when Hengda Real Estate applied to suspend trading for a day. While trading technically resumed on Sept. 17, it now only takes place through negotiated transactions in what traders said was an attempt to curb volatility.
While concerns about the spillover from a messy collapse roiled markets on Monday, U.S. stocks were flat on Tuesday and Chinese shares fell in early trade after a two-day public holiday. But China's property index recovered losses and was up more than 3%, while banking stocks were down around 3%.
Evergrande is so deeply intertwined with China's broader economy - from retail investors to infrastructure-related firms that are a gauge for global commodities demand - that fears over contagion have kept financial markets on tenterhooks.
"There's been a fair bit of concern about the possibility of contagion," analysts at New York-based Bespoke wrote in a research note on Tuesday. "But so far that concern isn't showing up in parts of the credit markets that have served well as red flags for broader credit crunches in the past." Evergrande missed interest payments due Monday to at least two of its largest bank creditors, Bloomberg reported https://www.bloomberg.com/news/articles/2021-09-21/evergrande-misses-loan-payments-to-banks-as-bond-deadlines-loom on Tuesday, citing people familiar with the matter. The missed payments had been expected as China's housing ministry had said that the company would be unable to pay on time, Bloomberg said.
As investors and policymakers around the world tried to assess the potential fallout, Securities and Exchange Commission (SEC) Chair Gary Gensler said the U.S. market is in a better position to absorb a potential global shock from a major company default than it was before the 2007-2009 financial crisis.
FED MEETING Fed Chair Jerome Powell will likely be asked about the fallout from Evergrande when he speaks after the Fed's two-day meeting that wraps up on Wednesday at 2 p.m. ET. (1800 GMT).
Despite the looming default, some funds have been increasing their positions in recent months. Fund giant BlackRock and investment banks HSBC and UBS have been among the largest buyers of Evergrande's debt, Morningstar data and a blog post showed.
-- Reuters
What is Evergrande?
Evergrande Group, founded in 1996, is one of China’s biggest builders of apartments, office towers and shopping malls.
The company says it has more than 200,000 employees and supports 3.8 million jobs in construction and other industries. Evergrande says it has 1,300 projects in 280 cities and assets worth 2.3 trillion yuan ($350 billion).
Evergrande’s founder, Xu Jiayin, was China’s richest entrepreneur in 2017 with a net worth of $43 billion, according to the Hurun Report, which follows China’s wealthy. He has tumbled down the list as internet industries boomed but still ranked as China’s richest real estate developer last year. He also topped Hurun’s 2020 list of philanthropists, giving away an estimated 2.8 billion yuan ($420 million).
Evergrande has branched out into electric vehicles, theme park development, health clinics, mineral water and other businesses.
The People's Bank of China pumped 120 billion yuan ($18.6 billion) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan. The matches the amount seen on Friday, and was just below that of Saturday. Sentiment was also boosted after Evergrande's onshore property unit said it plans to repay interest due Thursday on its local bonds.
"The PBOC's net injection is probably aimed at soothing nerves as the market worries about Evergrande," said Eugene Leow, a senior rates strategist at DBS Bank Ltd. in Singapore. "While the aim may be to instill discipline, there is also a need to prevent contagion into the real economy or to other sectors."
The need to calm market jitters is pressing amid losses in China-related equities worldwide over recent days amid concern over Evergrande's debt woes. The benchmark CSI 300 Index fell as much as 1.9% Wednesday after the Hang Seng China Enterprises Index - a gauge of Chinese shares traded in Hong Kong - slid the most in two months on Monday. Losses came even as Wall Street analysts sought to reassure investors that Evergrande won't lead to a Lehman moment.
-- Bloomberg
What is the impact so far?
Evergrande’s Hong Kong-traded shares have fallen 85% since early 2021. Its bonds are trading at an equally deep discount.
Xu built Evergrande on borrowed money. As of June 30, Evergrande reported 2 trillion yuan ($310 billion) of outstanding debts to bondholders, banks, construction contractors and other creditors.
Of that debt, 240 billion yuan ($37.3 billion) was due within a year, nearly triple Evergrande’s 86.8 billion yuan ($13.5 billion) in cash holdings, according to a company financial report.
In early 2021, Evergrande forecast its total annual transaction volume would surpass 2 trillion yuan ($310 billion). It reported a $1.4 billion first-half profit but says sales are weakening because news of its cash crunch is making would-be buyers nervous.
Why now?
Evergrande has been squeezed by new limits regulators imposed on real estate-related borrowing as part of the Communist Party’s campaign to reduce reliance on debt.
Economists have been warning China’s rising debt is a potential threat for more than a decade. The ruling party has made reducing such financial risks a priority since 2018. But total corporate, government and household borrowing rose to nearly 300% of economic output last year from 270% in 2018. That’s unusually high for a middle-income country.
News reports indicate Evergrande borrowed everywhere it could, including by requiring employees of its construction contractors to buy its debt.
In 2017, state-owned China Citic Bank in Shenzhen agreed to lend 40 billion yuan ($6.2 billion) for an Evergrande project only after its executives agreed to invest at least 3 million yuan ($465,000) each, according to the business news magazine Caixin.
China’s Lehman moment?
Some commentators suggest Evergrande might become China’s ``Lehman moment,’’ referring to the failure of Wall Street bank Lehman Brothers, a forerunner to the 2008 crisis. But economists say the risk of wider financial market contagion is low.
``A managed default or even messy collapse of Evergrande would have little global impact beyond some market turbulence,’’ said MacAdam of Capital Economics.
Evergrande has $18 billion of outstanding foreign-currency bonds, but much of that is held by Chinese banks and other institutions. Unlike Lehman, whose assets were financial instruments whose prices can swing wildly, Evergrande has 1.4 trillion yuan ($215 billion) of land and partially completed projects with relatively stable prices.
In the unlikely event of an outright default, China’s banking system has an annual profit of 1.9 trillion yuan and reserves of 5.4 trillion yuan against bad loans, ``which could easily absorb the loss,’’ Larry Hu and Xinyu Ji of Macquarie Group said in a report.
What next?
Investors are waiting to see what Chinese regulators might do, but analysts say they appear to be focused on protecting home buyers by ensuring apartments already paid for are completed.
The government has injected money into other insolvent Chinese companies, but economists say Beijing appears determined to avoid doing that with Evergrande.
In August, Huarong Asset Management Co., Ltd., the biggest of a group of companies created to help resolve bad loans held by state banks, was bailed out by a capital injection from state-owned companies after it lost 102.9 billion yuan ($15.9 billion) last year.
In a letter Tuesday to employees, Xu expressed confidence the company will survive.
``Evergrande will surely get out of the darkest moment as soon as possible,’’ Xu said in the letter marking the traditional Mid-Autumn Festival.