BOSTON – Just three months after the collapse was barely prevented, the world’s most heavily indebted developer China Evergrande Group is again on the brink and investors are not yet sure how strong and how long the problems could reverberate.
With over $ 300 billion ($ 410 billion) in debt and more than 1,300 real estate projects, Evergrande was the figurehead of a real estate crisis in China that has already demolished nearly a dozen smaller developers.
Evergrande could still pay an overdue $ 82.5 million bond that has now reached the end of its grace period, but has warned against it. Some offshore bondholders received no payments until the end of a 30-day grace period on Monday (December 6, New York time).
At a time when real estate sales in China are slowing, a disorderly default by Evergrande could accelerate financial stress across the real estate sector, said Logan Wright, director of market research in China at consulting firm Rhodium Group.
A liquidation must be billions of yuan due to contractors and suppliers.
“At the moment there is very little clarity about the potential sources of this funding, although there is greater confidence that the authorities will respond with a determination to limit the financial contagion,” Wright said.
After narrowly avoiding Evergrande for the past few months, with payments coming in the 11th
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But unlike a few months ago, the aftermath in China has largely been contained, and as Beijing policymakers get louder and markets better known, the aftermath of Evergrande’s troubles will be less widespread, investors say.
Liqian Ren, a WisdomTree director who follows China, believes Evergrande is likely to default.
Still, she cited Friday’s central bank statement and other official statements like this one in which she promised that Evergrande was an individual matter and that long-term funding functions would not suffer.
“Contagion happens when you have something that nobody knows who owns what,” and things are moving quickly, she said. Rather, a default by Evergrande would more closely resemble the case of the HNA Group, whose restructuring plan was approved by creditors in October.
Tracy Chen, portfolio manager for fixed income at Brandywine Global Investment Management, also assessed the general risks of a collapse of the Evergrande as low.
“I think systemic risk is very unlikely, and regulators have done a good job of turning this into something called a ‘limited detonation’,” said Chen.
China’s central bank has pumped 1.2 trillion yuan into the banking system, the second of its kind since July, and the Evergrande regional government has announced that it will intervene now.
Risk of contagion
Within China, the question arises for industry experts whether this can prevent further infection.
Since Dodging in October, some of Evergrande’s lesser rivals have either gone under or restructured. Kaisa, China’s first default in 2015 that will have to refinance over $ 3 billion in debt next year, is also in serious conflict.
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“In general, not much has changed (since the Evergrande deadline in October), but market sentiment has changed,” said Seaport Global analyst Himanshu Porwal, pointing to the number of minor defaults.
It is positive that provincial governments wanted to interfere in cases like Evergrande, he said, but none of the state-owned real estate firms have been involved in the company’s projects to alleviate the liquidity crisis.
Meanwhile, the damage continues in the country.
China’s high yield real estate bonds have seen their worst year on record this year, losing more than a third of their value on average, while Evergrande, Kaisa and defaulting companies like Fantasia lost at least 80 percent.
JPMorgan has already had a total of 11 defaults this year, and with home sales plummeting over 55 percent year-over-year and home sales even down 25 percent in October, more are expected.
Beijing needs to be more direct with its support.
“To prevent contagion from cascading up the credit curve, regulators would need to think about stabilizing both physical demand and financial markets,” said Frank Pan, head of Asia corporate research for the company.
“The concern is that if regulators fail to prevent widespread defaults within the sector, there may be more bonds trading at distressed levels.”
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