Fears of contagion over Chinese automakers’ debt problems are easing
BEIJING – Fears that a possible default by a Chinese real estate developer on multibillion-dollar debt could send shockwaves through global financial markets appeared to subside on Thursday as creditors waited to see how much they could recoup .
Shares of Evergrande Group, one of China’s largest private sector conglomerates, rose 18% in Hong Kong after the company said it would pay interest to bondholders in China.
The company has given no sign if it will make a payment due Thursday on a separate overseas bond.
Evergrande’s struggle has raised fears that it will destabilize China’s financial system and trigger a global chain reaction. But economists have said that even though Chinese banks and other creditors are likely to suffer losses, there seems little chance that a default on its 2,000 billion yuan ($ 310 billion) in debt will harm. to the Chinese system or is reflected in the financial markets abroad.
“It’s definitely a local problem in China,” said Robert Carnell, head of Asian research at ING.
“There will be suppliers and others who go bankrupt,” said Carnell. “But it’s not systemic in a way that I can put my finger on.”
Chinese regulators have yet to say what Beijing might do. But despite this, plus the uncertainty over which loss banks and individual buyers of Evergrande bonds could lose, stock markets appeared to be recovering from the anxiety that drove Chinese stocks down on Monday.
China’s benchmark Shanghai Composite Index closed 0.4% higher on Thursday. Hong Kong’s Hang Seng rose 1.2%. The markets of Australia and Southeast Asia, where economies rely heavily on trade with China, have also grown.
Markets are “at worst, it’s frenzy” after Evergrande’s promise to pay bondholders, Oanda’s Jeffrey Halley said in a report.
Evergrande has been caught by tighter borrowing restrictions imposed by Chinese regulators last year in a campaign to reduce the economy’s dependence on rising debt. The company has sold billions of dollars in assets to meet government limits.
Evergrande billionaire founder Xu Jiayin has expressed confidence in the company’s survival, but has yet to announce a debtor repayment plan.
This includes a payment of $ 83.5 million due Thursday to overseas buyers of a US dollar-denominated bond. The company has one month to pay before being declared in default.
Economists say any government action is likely to focus on protecting Chinese families who have paid for apartments that are yet to be built, rather than bailing out banks or other creditors.
Beijing has the resources to prevent a Chinese credit crunch if Evergrande defaults. But he doesn’t want to sound like he’s organizing a bailout as he tries to force others to reduce debt, economists say. The ruling Communist Party fears that the increase in debt accumulated during China’s boom years could cause problems as economic growth slows.
On Thursday, one of Evergrande’s major shareholders, Chinese Estates Holdings Ltd., announced that it had sold part of its stake at a loss and may sell its remaining 5.66% of the company. Chinese Estates said it suffered a loss of HK $ 1.4 billion ($ 177 million).
Evergrande’s debt problems come at a time when Chinese economic growth is expected to weaken due to a slowdown in construction and home sales due to government pressure on the real estate sector to reduce dependency to borrowed money.
On Thursday, Fitch Ratings cut its growth forecast for China this year to 8.1% – still among the strongest in the world – from 8.4%, citing the slowdown in real estate.
Meanwhile, S&P Global Ratings lowered the debt of a small Chinese developer, Xinyuan Real Estate Co., which has delayed the release of 2020 results. S&P said that Xinyuan, whose shares are traded on the New York Stock Exchange , faces “refinancing difficulties” that will make it harder to service the $ 229 million debt owed to lenders abroad in October.
Hundreds of small Chinese developers have gone bankrupt since Beijing began tightening financial controls on the industry in 2017.
Some commentators have suggested that Evergrande could become a “Lehman moment”, citing the 2008 collapse of Wall Street bank Lehman Brothers before the global crisis. But economists say Evergrande’s debts are relatively straightforward compared to a Wall Street bank and seem unlikely to trigger a chain reaction.
Evergrande’s debt is equivalent to 2% of China’s annual economic output, but economists say the public banking sector can absorb a possible default.
“Some banks will be exposed,” said ING’s Carnell. “The big ones can get by. The little ones don’t matter.
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