It’s the critical moment for Chinese Evergrande

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By Laura He, CNN Business

It’s time for crisis for heavily indebted China Evergrande Group.

The sprawling Chinese real estate conglomerate faces a critical test Thursday: can it meet its obligations to bondholders, or will it get closer to default?

Evergrande is expected to pay $ 83.5 million in interest on a dollar-denominated bond Thursday, according to data from Refinitiv. It is not yet known whether the company will make this payment. Investors have already been rocked by the risk of one of China’s biggest developers collapsing, sending shock waves through the world’s second-largest economy.

The company is also expected to pay interest on a yuan bond due on the same day, although it has already reached an agreement with bondholders on that payment, according to an Evergrande stock file on Wednesday.

Even if Evergrande does not payment of $ 83.5 million immediately, he may still have time. The company has a 30-day grace period before “officially going default,” wrote Jeffrey Halley, senior market analyst for Asia-Pacific in Oanda, in a research note this week.

But any missed deadline will fuel investor anxiety about the viability of the business.

Evergrande is stumbling under $ 300 billion in debt, largely held by Chinese financial institutions, retail investors, home buyers and its suppliers in the construction, materials and design industries. Foreign investors also hold part of its debt. In recent weeks, the company has twice warned investors that it could default if it is not able to raise funds quickly.

It is not yet clear whether the company will actually default or whether Beijing will step in and orchestrate some type of restructuring to contain the fallout on the financial system and the Chinese economy as a whole.

Will Beijing bail out Evergrande?

Real estate represents more than 7% of the Chinese economy, and many analysts believe the Chinese government will eventually intervene to some extent, although a full bailout is unlikely.

“We don’t expect government actions to help Evergrande unless systemic stability is threatened,” S&P Global Ratings analysts said in a research report earlier this week. “A government bailout would undermine the campaign to bring greater financial discipline to the real estate industry. “

Instead of a bailout, analysts expected the government to focus on steering Evergrande through an orderly process of debt restructuring or bankruptcy, while facilitating negotiations and funding. to ensure that small investors and home buyers are protected “as much as possible”.

Only if the Evergrande contagion came to would cause other big developers to fail, would the government intervene directly, they added. But they believe that the only blow to the financial system by Evergrande will always be “manageable.”

Macquarie Group economists, meanwhile, also don’t think a “big bailout” of Evergrande is likely.

“The government would ensure that pre-sold apartments are built and delivered to homebuyers,” they said, while adding that shareholders and lenders could “suffer a big loss”.

However, Beijing will be careful to avoid any escalation in protests recently staged by investors and apartment owners, who have gathered outside Evergrande’s headquarters in Shenzhen to demand their repayment.

Long-standing concerns

Evergrande’s troubles have been brewing for a while. In recent years, debts have exploded as she borrowed to finance her various activities, from housing and electric vehicles to sports and theme parks. Then, in August 2020, Beijing began to curb excessive borrowing in the real estate sector in order to prevent the housing market from overheating and restraining debt growth.

In recent weeks, Evergrande’s liquidity crisis has intensified, causing the company’s stocks and bonds to fall further.

The need to “soften the blow” for small investors will likely be at the center of any restructuring of Evergrande, according to Robert Carnell, head of research for Asia-Pacific at ING Economics.

He cited Chinese President Xi Jinping’s recent emphasis on “Common prosperity” and a need to redistribute wealth in the interest of “social equity”. This engagement influenced Beijing’s decision radical repression on technology, finance, education and other sectors, as it accuses the private sector of being the source of financial risks and of exacerbating corruption and inequality.

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