Evergrande stock skyrockets as the debt maturity passes. It’s not yet clear

The sprawling Chinese real estate conglomerate faced a critical test on Thursday: Could it meet its obligations to bondholders, or come close to the default it warned could happen?
Evergrande was due to pay $ 83.5 million in interest on a dollar-denominated bond, according to data from Refinitiv. It is not clear whether the company made this payment, and it had not commented before the Hong Kong market closed.

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 was also due to pay interest on a yuan bond on Thursday. He had already reached an agreement with bondholders on the payment, according to a stock file released on Wednesday.

Following the announcement, Evergrande’s stock rebounded to 32% on Thursday, as the Hong Kong market reopened after a public holiday. He ended the day up almost 18%. The largest Hang Seng Index (HSI) closing up 1.2%, driven by real estate and financial stocks.

“The sentiment is much better after the news yesterday,” said Julian Evans-Pritchard, senior Chinese economist for Capital Economics. But the prospects for paying offshore bonds remain “uncertain” and Evergrande is “far from solving its problems,” he added.

“We will see Evergrande make more defaults. Even if he avoids defaulting today, the situation is not improving unless the government steps in,” Evans-Pritchard said.

Chinese Estates, Evergrande’s second largest shareholder and a long-time business ally of the company, told Thursday at a stock market deposit that he has previously sold Evergrande shares worth 246.5 million Hong Kong dollars ($ 31.7 million) over the past few weeks. The company could also sell its remaining shares, he added. Chinese Estates shares gained 5.5% in Hong Kong.

Even though Evergrande did not make the payment of the $ 83.5 million bond on Thursday, there may still be time. The company has a 30-day grace period before “officially defaulting,” Jeffrey Halley, senior market analyst for Asia-Pacific in Oanda, wrote 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, according to official data. Some analysts believe the number could be much higher if other related industries, ranging from construction to material suppliers, were included. According to the Berenberg researchers, it is estimated that real estate activities represent as much as 29% of China’s GDP, and many 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 guiding Evergrande through an orderly process of debt restructuring or bankruptcy, while also easing negotiations. and financing 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”.

Economists in the Macquarie Group, meanwhile, also do not think a “wholesale bailout” of Evergrande is likely.

“The government would ensure that the pre-sold apartments are completed and delivered to homebuyers,” they said, adding that shareholders and lenders could “take 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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