Evergrande troubles punish Chinese property sector as contagion concern spreads

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Growing fears of a China Evergrande default stirred global markets on Monday as investors dumped stocks of Chinese assets and sought refuge in safe-haven assets, worried about the potential impact on the broader economy.

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Shares in Evergrande, which has been scrambling to raise funds to pay off many of its lenders, suppliers and investors, closed down 10.2% on Monday at HK$2.28, its weakest since May 2010. level had fallen by 19%.

Regulators have warned that if China’s debt is not stabilized, its liabilities of $305 billion could pose a wider risk to China’s financial system.

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World stocks fell and the dollar strengthened as investors worried about spillover risks to the global economy. US stocks were sharply lower, with the S&P 500 down nearly 2%.

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A big test comes this week, with Evergrande due Thursday to pay $83.5 million in interest related to its March 2022 bond. It has a further $47.5 million payment due on September 29 for the March 2024 notes.

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

Any default scenario, between Evergrande, a looming recession, a managed collapse or a low probability of a bailout by Beijing, will require a restructuring of the bonds, but analysts expect a lower recovery ratio for investors.

Evergrande’s troubles also put pressure on the broader property sector, with Hong Kong-listed shares of small-sized Chinese developer Cynic Holdings down 87%, wiping $1.5 billion from its market value before suspending trading.

Evergrande executives are working to protect its business prospects, which include starting to repay investors in its wealth management products with real estate.

“(Evergrande’s) stock will continue to fall, as there is no solution yet that is helping the company ease its liquidity stress, and there are still a lot of uncertainties about what the company will do in terms of restructuring,” said Kington. said Lynn, managing director of the asset management department at Canfield Securities Ltd.

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Lin said shares of Evergrande could drop below HK$1 if it is forced to sell most of its assets in a restructuring.

“At the moment, I do not see any systemic risk to the global economy from the Evergrande situation, but there is no need for any systemic risk to impact the markets,” said David Bunsen, chief investment officer at One, based in Newport Beach, Calif. Wealth management firm, Bunsen Group, said in an emailed comment.

However, there was some belief that the situation would be contained.

Alvin Tan, FX strategist at RBC Capital Markets, said in a research note, “Beijing has demonstrated in recent years that it is fully capable and ready to prevent widespread transition when major financial/corporate institutions fail. “

dollar bond

Despite growing concerns about the future of what was once the country’s best-selling property developer, analysts have drawn comparisons to the collapse of US investment bank Lehman Brothers in 2008.

“At first, there may be a restructuring of dollar bonds, but most of the debt is in global mutual funds, ETFs and some Chinese companies, not banks or other important financial institutions,” said Ryan Detrick of LPL Financials.

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“Lehman Brothers was put on the books of almost all other financial institutions,” he said. “Second, we think the Chinese will join the communist government in the event of a lapse in favor of it.”

Policymakers in China are asking major lenders of Evergrande to extend interest payments or rollover loans, but market watchers believe a direct bailout from the government is unlikely.

The People’s Bank of China, its central bank and the country’s banking watchdog, in August called on Evergrande officials in a rare move and warned it needed to reduce its credit risk and prioritize stability.

The trading of the company’s bonds underscores how sharply investor expectations about its prospects have fallen this year.

The 8.25% March 2022 dollar bond traded at 29.156 cents on Monday, up more than 500 per cent compared to 13.7 per cent at the start of the year. The 9.5% March 2024 bond was at 26.4 cents, up more than 80% compared to 14.6% in early 2021.

property punishment

Goldman Sachs said last week that because Evergrande has dollar-denominated bonds issued by both the parent and a special purpose vehicle, recovery in a potential restructuring could differ between the two sets of bonds, and the process could be lengthy.

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Meanwhile, investors are mainly concerned about the risk of contagion in the debt-ridden Chinese property sector, which came under pressure with the yuan on Monday.

The yuan fell to a three-week low of 6.4831 per dollar in offshore trade.

Hong Kong-listed Cynic, which saw massive selling pressure, has about $700 million in offshore debt maturing before June 2022, including $246 million a month — a bond that’s about 89 cents on the dollar. has fallen till

Cynic has a junk rating from Fitch, which downgraded its outlook from negative to negative on Friday.

Other property stocks, such as China’s No. 4 property developer Sunak, fell 10.5%, while state-backed Greentown China declined nearly 6.7%.

Guangzhou R&F Properties Co said on Monday it is raising up to $2.5 billion by borrowing from major shareholders and selling off a subsidiary, highlighting a scramble for cash as signs of distress spread across the sector.

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