Evergrande’s China default fears haunt investors as Beijing retreats, so far

HONG KONG / NEW YORK, Sept.21 (Reuters) – Fears of default continued to haunt China Evergrande on Tuesday despite efforts by its chairman to boost confidence in the struggling company, as markets sought possible intervention of Beijing to stem any domino effect across the global economy.

Analysts downplayed the threat of Evergrande’s problems becoming 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 the steps.

In an effort to rekindle confidence in the company, Evergrande (3333.HK) chairman Hui Ka Yuan said in a letter to staff that the company is confident it “will come out of its most pressing moment.” dark ”and will carry out real estate projects as promised.

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.

“I firmly believe that with your concerted efforts and hard work, Evergrande will emerge from its darkest moment and resume large-scale construction as soon as possible,” Hui said, without explaining how the company might achieve these goals.

Evergrande investors, however, remained nervous.

Its shares were sold again on Tuesday, falling as much as 7%, after falling 10% the day before, fearing its $ 305 billion debt could cause widespread losses in China’s financial system if it collapses.

Other real estate stocks such as Sunac (1918.HK), China’s 4th largest real estate developer, and state-backed Greentown China (3900.HK), recovered some of their heavy losses in the previous session on Tuesday.

However, fallout concerns were at the forefront of investor concerns. On Tuesday, S&P Global Ratings downgraded Sinic Holdings (Group) Co Ltd (2103.HK) to “CCC +”, citing the Chinese developer’s failure “to communicate a clear repayment plan.”

Small Chinese developer Sinic’s Hong Kong-listed shares plunged 87% on Monday, wiping $ 1.5 billion from its market value before trading was suspended.

Elsewhere in Asia, strong selling pressure persisted, with investors fleeing riskier assets amid fears of contagion from Evergrande. Mainland Chinese markets are closed for a public holiday, while markets in Hong Kong, where the company is listed, will be closed on Wednesday.

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 takes place 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 (Evergrande’s) equity will be wiped out, the debt looks in trouble and the Chinese government will dismantle this company,” Andrew Left, founder of US-based Citron Research and one of the best known in the United States. world. short sellers, told Reuters.

“But I don’t think this will be the straw that breaks the camel’s back for the global economy,” Left said.

In June 2012, a report released a report that Evergrande, which has struggled to raise funds to pay off its many lenders, suppliers and investors, was insolvent and defrauded investors.

RISKS OF DETERMINATION

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

“The spin-off of non-core activities, for example, those that are not residential real estate type, will probably be done first,” wrote Iris Pang, ING chief economist for Greater China.

“After that could come the sales of holdings which are at the heart of Evergrande’s business,” Pang said. “We do not believe, however, that it is inevitable that Evergrande will be taken over by a state-owned company and become a state-owned company itself.”

Citi analysts in a research note said regulators could “buy time to digest” Evergrande’s nonperforming loan problem by guiding banks not to take out credit and extend interest payments. .

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 obtain a bank loan.

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.

“We 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,” the rating agency said.

“Evergrande on its own would fail in such a scenario,” S&P said.

Reporting by Svea Herbst-Bayliss, Clare Jim, Tom Westbrook, Alun John and Anshuman Daga; Writing by Megan Davies and Sumeet Chatterjee; Editing by Stephen Coates and Shri Navaratnam

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