The risks of Chinese group Evergrande defaulting on its mountain of debt were significant in nervous markets on Tuesday, as investors looked for signs of Beijing intervention to stem any potential domino effect in the global economy.
Analysts downplayed the threat that Evergrande’s problems would become the country’s ‘Lehman moment’, although concerns over the spillover risks of a messy collapse of what was once China’s best-selling real estate developer have rocked financial markets.
“We believe that Beijing would only be forced to intervene if there was a large-scale contagion causing the failure of several major developers and posing systemic risks to the economy,” according to an S&P report dated September 20. . in such a scenario.
Still, the problems could further undermine investor confidence in China’s real estate sector and rated credit markets more generally, the credit assessor said.
In an effort to allay investor anxiety, Evergrande chairman Hui Ka Yuan said in a letter to staff, the company is confident it will “come out of its darkest moment” and complete real estate projects. as promised, local media reported on Tuesday.
In the letter, coinciding with the Chinese Mid-Autumn Festival, the chairman of the indebted property developer also said that Evergrande will shoulder its responsibilities to property buyers, investors, partners and financial institutions.
Evergrande investors, however, remained nervous.
Its shares were sold again on Tuesday and fell 7% after falling 10% the day before over fears its $ 305 billion debt could cause widespread losses in China’s financial system if it collapses.
Other real estate stocks such as Sunac, China’s fourth largest real estate developer, and state-backed Greentown China recovered some of their heavy losses in the previous session on Tuesday.
Elsewhere in Asia, strong selling pressure persisted at the start of trading as investors fled riskier assets amid fears of contagion from Evergrande. Mainland Chinese markets are always closed for a public holiday.
A major test
The Chinese government has been largely silent on the crisis in Evergrande, and there was no mention of the company’s problems in mainstream state media during a public holiday.
A major test for Evergrande comes this week, with the company due to pay $ 83.5 million in interest on its March 2022 bond on Thursday. He has another payment of $ 47.5 million due on September 29 for the March 2024 tickets.
Both bonds would default if Evergrande does not pay the interest within 30 days of the scheduled payment dates.
“I think [Evergrandeâs] equity will be wiped out, debt looks in trouble and the Chinese government will dismantle this business, âAndrew Left, founder of US-based Citron Research and one of the world’s best-known short sellers, told Reuters news agency.
âBut I don’t think this will be the straw that breaks the camel’s back for the global economy,â Left said.
Left released a report in June 2012 that Evergrande, which has struggled to raise funds to pay off its many lenders, suppliers and investors, was insolvent and defrauded investors.
Growing investor concern
Citi analysts, in a research note released Tuesday, said regulators could “buy time to digest” Evergrande’s non-performing loan problem by guiding banks not to withdraw credit and extend the deadline payment of interest.
These analysts said there was “growing investor concern about the potential spillover risk” of Evergrande’s debt tightening, given the potential liquidity drain for private developers due to the increased difficulty in get bank credit and the contagion effect in the banking sector, as they expect about 40.7%. of Chinese bank assets are linked to the real estate sector.
Still, Citi said that while the Evergrande default crisis was a potential systemic risk to China’s financial system, it was not shaping up to be “China’s Lehman moment.”
In any default scenario, Evergrande, oscillating between a messy meltdown, a managed meltdown, or the less likely prospect of a bailout by Beijing, will have to restructure bonds, but analysts expect a low recovery rate for investors.
Michael Purves of Tallbacken Capital Advisors in New York City said in a note to clients that China’s foreign exchange reserves are “arguably in better shape” now than they were in the past, in case Beijing chooses to “throw money at Evergrande”.
S&P Global Ratings said in a report Monday that it does not expect Beijing to provide direct support to Evergrande.
âWe believe Beijing would only be forced to intervene if there was a large-scale contagion that bankrupted several large developers and posed systemic risks to the economy,â the rating agency said.
“The failure of Evergrande alone would result in little chance in such a scenario,” S&P said.