The risks of China’s Evergrande Group defaulting on its mountain of debt loomed large over nervous markets on Tuesday, as investors looked for signs of intervention by Beijing to stem any potential domino effect 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 financial markets.
“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,” according to an S&P report dated September 20. “Evergrande failing alone would unlikely result in such a scenario.”
Still, troubles could further hit investor confidence in China’s property sector and junk-rated credit markets more broadly, the credit assessor said.
In an effort to assuage investor anxiety, 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, local media reported on Tuesday.
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.
Investors in Evergrande, however, remained on edge.
Its shares were sold off again on Tuesday, and fell as much as 7 percent after tumbling 10 percent in the previous day on fears its $305bn in debt could trigger widespread losses in China’s financial system in the event of a collapse.
Other property stocks such as Sunac, China’s number four property developer, and state-backed Greentown China on Tuesday recouped some of their hefty losses in the previous session.
Elsewhere in Asia, broad selling pressure persisted in early trade, as investors fled riskier assets on Evergrande contagion fears. Mainland China markets are still closed for a public holiday.
A major test
The Chinese government has been largely quiet on the crisis at Evergrande, and there was no mention of the firm’s troubles in leading state media during a public holiday.
A significant test for Evergrande comes this week, with the firm due to pay $83.5m in interest relating to its March 2022 bond on Thursday. It has another $47.5m payment due on September 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,” Andrew Left, founder of the US-based Citron Research and one of the world’s best-known short-sellers, told Reuters news agency.
“But I don’t think that this is going to be the straw that breaks the global economy’s back,” Left said.
Left published a report in June 2012 that said Evergrande, which has been scrambling to raise funds to pay its many lenders, suppliers and investors, was insolvent and had defrauded investors.
Mounting investor concern
Citi analysts, in a research note on Tuesday, said 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.
Those analysts said there was “mounting investor concern about potential risk spillover” from Evergrande’s debt crunch, considering the potential liquidity drain for private developers due to increased difficulty in obtaining bank credit, and the contagion effect in the banking sector as they expect about 40.7 percent of China banks’ assets are related to the property sector.
Still, Citi said 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”.
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.
Michael Purves at Tallbacken Capital Advisors in New York said in a note to clients that China’s foreign currency reserves were “arguably in better shape” now than they had been in the past, in the event Beijing chose to “throw money at Evergrande”.
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.