China Evergrande Group

China Evergrande fallout spooks world markets

Investors are increasingly worried about the contagion risk

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Growing fears of embattled developer China Evergrande Group defaulting is spooking world markets with a decline in equities in all corners of the world. Hong Kong’s Hang Seng Index tumbled more than 3% on Monday (Sept. 20), the S&P 500 Index lost 1.7% marking its worst day of trading since May while the paneuropean STOXX 600 also fell 1.7%. Exchanges in mainland China were closed for a public holiday.

Evergrande, the second largest property development company in China is in deep debt: $305 billion in liabilities, to be precise. Interest payments on the company’s bonds are due later in the week ($83.5 million in interest relating to its March 2022 bond on Thursday, according to data from S&P Global Ratings. It also has another $47.5 million payment due on Sept. 29 for March 2024 notes.

S&P Global warned that the company was in the brink of default and regulators said that its $305 billion in liabilities could spark broader risks to China’s financial system if its debts are not stabilised.
Such a potential default has sparked fears of contagion, not just within the domestic property sector, but also on other parts of the economy.

Evergrande’s shares closed down 10.2% at HK$2.28 on Monday, after earlier losing as much as 19% hitting their weakest level since May 2010.

The Shenzhen-headquartered firm’s troubles also pressured the broader property sector, with Hong Kong-listed shares of Shanghai-based developer Sinic Holdings down 87%, wiping $1.5 billion off its market value before trading was halted. China’s No.4 property developer Sunac sank 10.5%, while state-backed Greentown China shrunk by 6.7%.

The sudden selloff in Hong Kong was accompanied by a surge in trading volume that was about 14 times its average in the past year, according to Bloomberg.

Evergrande’s chairman tried to reassure markets on Tuesday (Sept.21), saying the firm will fulfill its responsibilities to lenders, suppliers and investors, Reuters reported, citing local media.
Protests by angry homebuyers and investors have broken out in recent weeks in some cities, and social unrest is a key concern.

China Evergrande share price

About China Evergrande Group

Founded in 1996 by businessman Hui Ka Yan in 1996 in Guangzhou, southern China, Evergrande Group (formerly called the Hengda Group) has about 2 trillion yuan in assets equivalent to 2% of China’s gross domestic product according to Goldman Sachs calculations. The Group’s businesses range from real estate, wealth management, making electric cars and food and drink manufacturing. It even owns one of country’s biggest football teams – Guangzhou FC and is currently building a new stadium for it. Evergrande Real Estate currently owns more than 1,300 projects in more than 280 cities across China The company employs 200,000 people and sustains 3.8 million jobs in related industries, according to its website.

What analysts say

Some analysts, have played down comparisons to the 2008 collapse of U.S. investment bank Lehman Brothers while others have a different opinion.

Caixin on Tuesday (Sept. 21) in an article titled How Evergrande could turn into ‘China’s Lehman Brothers’ wrote the collapse of ‘too big to fail’ property developer may trigger financial tsunami.”

The Economist Intelligence Unit’s (EIU) Mattie Bekink told the BBC that the financial fallout would be far reaching. “Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms”

Citi said that while Evergrande’s default crunch was a potential systemic risk to China’s financial system, it was not shaping up as “China’s Lehman moment”.

And S&P Global Ratings said it does not expect Beijing to provide any direct support to Evergrande.
“We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy,” the rating agency said.
“Evergrande failing alone would unlikely result in such a scenario,” S&P said in a report on Monday.
Others expect the Chinese government to intervene soon and offer some sort of a financial bailout.

The bonds have a 30-day grace period, but the company’s sinking bond prices suggest investors think default is the most likely outcome. In any default scenario-whether that be a restructuring or total liquidation-analysts expect a low recovery ratio for Evergrande’s investors.

P.S. Lehman Brothers had $617 billion in debt when it filed for bankruptcy in 2008.

Evergrande Chairman
(Hui Ka Yan, chairman of Evergrande Real Estate Group Ltd,)

UPDATE 23/09/2021

Evergrande Group rebounded on Thursday (Sept. 23). Shares of the firm in Hong Kong jumped 17.62%, paring some gains after soaring more than 20% earlier. Hong Kong’s Hang Seng index rose 1.19% to close at 24,510.98. Evergrande’s Chairman Xu Jiayin sought to dispel fears of its collapse by stating it will “try its best to resume work and production” Reuters reported. The chairman also said the firm’s top priority is to help wealth investors redeem their products. Meanwhile, China’s central bank just pumped $18.6 billion in short-term cash into the financial system.