Evergrand fears cause stock market crash: Here’s what investors need to know about China’s property giant

An earlier version of this article incorrectly described a possible default time. The article has been revised.

Evergrand, a Chinese property giant with more than িয়ন 300 billion in nursing payments, is on the brink of default – sending global equity on Monday as investors, who previously ignored the situation, began to pay attention.

In the case of China, the fear of a property bubble burst has long been a concern for investors. According to the Financial Times, the heavily leveraged real estate sector accounts for more than 28% of China’s economy.

Evergrand’s dire situation has sparked controversy over how Chinese authorities should respond. Meanwhile, holders of Evergrand’s estimated 19 billion bonds are left to wonder what their investment will be. And shares of Evergrand 3333,
83% drowned in Hong Kong.

What’s going on?

Evergrand paid 8. 8.5 million in interest on its March 2-22 bond on Wednesday and 24 242.5 million on Sept. 220. Failure to process these payments within days0 of the due date will result in EverGrand defaulting.

FitchRatings, a credit rating firm, downgraded Evergrand’s rating from CCC + to CC on Sept. 7, indicating that they saw some defaults as possible. Evergrande is one of China’s top three property developers, although the residential real estate market is highly fragmented, Fitch analysts noted in a Sept. 1 report.

What is the reaction?

Concerns surrounding Evergrand were blamed for the volatility in global equity markets on Monday, with futures YM00,
At the Dow Jones Industrial Average DJIA,
More than 500 points and Future ES00,
In the S&P 500 SPX,
1.6% down

Treasury yields decreased, with the rate of 10 year Treasury note TMUBMUSD10Y,
The basis point has dropped as investors have been seen to snap safe haven assets. As the price of debt increases, so does the yield.

This was a turnout last week, when analysts noticed a lack of response from investors to Evergrand’s plight.

What is the risk?

In 2020, Evergrand’s market share was only 4%. Fitch said the risk of significant pressure on home prices would be lower if he did not default, unless his assets were restructured or liquidated. “Fitch believes this is something the authorities will want to avoid,” analysts wrote.

But the editor of the state-backed Global Times newspaper, after a Reuters report, warned that faith in the scene could be shaken, warning that Evergrand should not be considered “too big to fail”.

On Monday, the S&P Global Rating said that a default on Evergrand would create mere tensions in the financial markets, but it is unlikely to lead to a wave of default tides.

Matthew Chow, a credit analyst at S&P Global Ratings, said:

Analysts at UBS, led by Kamil Amin, said in a note on Thursday that the likelihood of market expansion would depend on whether Evergrand would be restructured or fully liquidated. What analysts wrote was confident that a restructuring remained the most likely outcome.

“In the case of restructuring, we expect the bonds to come out from under them and the transition will be greatly limited,” they said.

But in the case of liquefaction, there could possibly be “high-level infections,” they warned. Spillovers will happen, they said, through three:

  1. Investors are experiencing very low recovery rates, something that could erode investor confidence in the broader property sector and in Asia’s high-yielding offshore markets and spread to larger Chinese financial assets.

  2. A domino effect of credit events, considering that both banks and nonbanks with large exposure to Evergrand could potentially go under or be forced to restructure. This will in turn spread China’s other financial resources and reduce financial performance, especially in both cases. [developed market] And [emerging market] The credit / equity market, whose name is Evergrand itself with direct exposure, to its affiliates or its issuers.

  3. A complete liquidation will not comply with the Kipwell agreements (a written guarantee from a parent company that it will maintain the solvency of a subsidiary) – something that we believe will force rating agencies to reconsider their approach and remove multiple rating improvements and estimates offshore US dollar market. As well as state support across the non-property sector in the onshore market. This could increase selling pressure and cause greater liquidity distortions across the Chinese offshore and offshore bond markets, with EM credits likely to spread, as several EM credit accounts tend to hold Chinese offshore bonds as their top Asian portion. Yield exposure.

Why the delayed response?

Last week, some analysts argued that investors were more likely to look at Evergrand-related volatility.

“One of the best ways to think about China is that it is a country, but it manages it
It’s like a big company, “said Tom Essey, founder of Sevens Report Research.

Although there are “private” banks and corporations, in the end the Communist Party wants to effectively “own anything and everything,” he wrote.

“And because of this, there is really no risk of a global transition with Evergrand because in the end, and as far as we know, loans to Evergrand were given by Chinese banks that were indirectly lagged behind by the Chinese government and the Chinese government. . “

Also, investors took the Evergrand situation forward because China’s financial pressure has been seen as “a slow train wreck for some time, not something that has suddenly appeared,” Steve Barrow, head of Standard Bank’s G-10 strategy, said in a Friday note.

He said the financial collapse, including Long Term Capital Management, Bearings and Lehman Brothers, “came out of the left field,” and that he created domestic and international shock waves, he noted. But “the increasing nature of China’s various financial aid structures and difficulties could make global markets more vulnerable to the strains that seem to be coming to mind right now in the case of Evergrand.”

That said, investors had previously received “hope” from Chinese authorities, as noted by Thomas Matthews, an economist at Capital Economics, last week.

It was not until three weeks after the People’s Bank of China Baoshang Bank took over in 2019 that investors re-evaluated the underlying government backstop in the sector and the credit situation deteriorated, noting that authorities finally took steps to stabilize the situation, preventing many from reacting to Chinese markets.

But the market saw a massive expansion in 2015, he noted, adding that global equity fell sharply in August after China’s share fell 0%, prompting authorities to allow the renminbi to depreciate unexpectedly.

Matthews argued that a lesson from previous episodes was that “Chinese authorities will eventually take steps to stabilize the domestic financial market if Evergrand defaults on a large scale,” but may first allow a temporary deterioration of the financial situation.

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