Chinese real estate developer Evergrande has moved closer to the potential default that investors fear, missing a payment deadline in one of the clearest indications yet that the company is in deep trouble.
Evergrande owes A $ 418 billion, is cash-strapped, and investors fear a collapse poses systemic risks to China’s financial system and spillovers around the world.
A deadline to pay $ 83.5 million in bond interest passed without Evergrande’s remark and bondholders were neither paid nor heard from the company.
The business is now in uncharted waters and is entering a 30-day grace period. It will default if it goes without payment.
“These are periods of worrying silence because no one wants to take huge risks at this point,” said Howe Chung Wan, head of fixed income for Asia at Principal Global Investors in Singapore.
“There is no precedent for the size of Evergrande… we have to see in the next ten days or so, before China goes on vacation, how this will play out.”
On Friday, the Chinese central bank again injected liquidity into the banking system, seen as a signal of support for the markets. But authorities have remained silent on Evergrande’s predicament, and Chinese state media have offered no clue about a bailout.
Evergrande appointed financial advisers and warned of a default last week, and global markets fell sharply on Monday amid contagion fears, although they have since stabilized.
The conundrum for policymakers is how fiercely they can impose financial discipline without fueling social unrest, as a horrific collapse in Evergrande could crush a real estate market that accounts for 40% of Chinese household wealth.
Protests from disgruntled vendors, buyers and investors last week illustrated the dissatisfaction that could escalate if default payments trigger crises at other developers.
Evergrande has promised to prioritize these investors and resolved a coupon payment on a national bond this week. But he said nothing about the offshore interest payment that was due on Thursday or an A $ 65 million payment due next week.
Bondholders are starting to think it might be a month or so before things get any clearer and markets have already assumed they will take a big haircut.
“Current market prices believe that investors in Evergrande dollar bonds should recover very little,” said Jennifer James, portfolio manager and chief emerging markets analyst at Janus Henderson Investors.
“The most likely outcome is that the company will engage with creditors to reach a restructuring deal,” she said, warning that if such a deal was mismanaged, “the loss of confidence could have consequences. contagion effects “.
Global markets began to recover after the fate of Evergrande triggered a sharp decline, trading on the basis that the crisis can be contained.
So far there have been few signs of official intervention. The People’s Bank of China (AU $ 57.5 billion) cash injection of 270 billion yuan this week is the biggest weekly sum since January and has helped put a floor under stocks.
The Wall Street Journal quoted unnamed officials as saying authorities have asked local governments to prepare for the fall of Evergrande.
Associated Australian Press