Evergrande has a debt owed next week that she cannot pay. Why it’s not just China’s problem.


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The impending failure of Chinese real estate giant Evergrande has drawn international attention.

Greg Baker / AFP via Getty Images

China Evergrande Group has debt owed next week that it cannot pay, and investors should pay attention.

The woes of the real estate giant – the world’s most indebted developer – aren’t just China’s problem and could spill over into global financial markets.

China has already warned banks that Evergrande will not be able to pay debts due by September 20, according to reports, which will bring the group closer to a critical step towards failure. And the Chinese central bank has just taken measures to avoid a liquidity crisis, by injecting 90 billion yuan ($ 14 billion) into the country’s banking system on Friday, according to Bloomberg.

Debate rages on over how China should handle Evergrande, with the latest indication being that the group may be allowed to collapse.

The editor of the country’s flagship state newspaper said Evergrande shouldn’t expect a government bailout on the assumption that it’s “too big to fail.” Reuters reported– marking the first state-backed comment casting doubt on a rescue.

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(3333.HK) fell 3.4% in Hong Kong on Friday, dropping for the fifth day in a row and pushing the title down 82% so far this year.

Read also : Why China Might Seek “Controlled Detonation” for Struggling Developer Evergrande

Macro strategists at Swiss bank UBS, led by Kamil Amin, now consider a significant credit default inevitable. In a report released Thursday, they said the extent to which other markets see an overflow depends on whether Evergrande restructures or completely liquidates it. Contrary to what the editor of the Global Times said on Friday, UBS analysts remain convinced that the first result is much more likely than the second.

UBS estimates that Evergrande’s total liabilities are $ 313 billion, or about 6.5% of the total liabilities of the Chinese real estate industry, of which $ 19 billion is made up of outstanding offshore bonds. In the event of a total liquidation, the fallout would be significant, said Swiss bank strategists, with a “high degree of contagion” expected on three main channels.

First, there could be a significant loss of investor confidence in both the real estate sector and in Asian high-yield offshore debt, which could spill over into Chinese financial assets more broadly.

Second, it could trigger a domino effect of other defaults, as banks and other groups heavily exposed to Evergrande could go bankrupt or be forced to restructure.

Third, it could cause rating companies to change their methodologies, removing assumptions of state support in a range of sectors within the offshore US dollar bond market as well as the onshore market.

But there are reasons to believe that China will take action to limit the contagion. A report by the Capital Economics research group highlighted two historical cases: the buyout of Baoshang Bank by the Chinese central bank in 2019 – which worsened credit conditions – and the sharp fall in Chinese stocks and the country’s currency. in 2015.

One lesson from these episodes is that while Chinese authorities may allow a temporary crisis in financial conditions, they will ultimately intervene to stabilize domestic markets in the event of a large-scale default, the research group said. Another lesson is that it would take more than a cyclical slowdown in Chinese growth and stocks to significantly dampen global risk appetite, according to the Capital Economics report.

Other analysts believe Evergrande is, strictly, a Chinese problem.

“There is really no risk of global contagion with Evergrande,” said Tom Essaye of Sevens Report Research. “Ultimately, and as far as we know, the loans to Evergrande were made by Chinese banks which are implicitly backed by the Chinese government, and the Chinese government’s balance sheet can easily handle Evergrande’s losses which are valued at around $ 303 billion in liabilities. “

For now, there is no consensus.

Broker Oanda analyst Jeffrey Halley even suggested that if Evergrande collapses, it could have ripple effects on central banks as they consider slowing down their monthly asset buying programs during the pandemic. of Covid-19, which adds liquidity to the markets.

“A collapse of Evergrande might even be enough to keep the Fed in hand, such are the wider shockwaves it would cause,” said Halley, noting that he continues to believe “China will organize some sort of bailout with the mother of all outstanding debts / equity swaps.

Most analysts agree that concerns about Evergrande, along with Beijing’s recent wave of regulatory crackdown on companies, will keep Chinese stocks depressed. that of Hong Kong

Hang Seng Index

fell 3.7% over the past month, while the

S&P 500

the index climbed 0.6%.

Write to Jack Denton at [email protected]

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