Investors have already been rattled by the risk that one of China’s biggest developers could collapse, sending shockwaves through the world’s second biggest economy.
The company was also scheduled to pay interest on a yuan bond Thursday. It had already reached an agreement with bondholders on that payment, according to a stock exchange filing on Wednesday.
“The sentiment is a lot better after the news from yesterday,” said Julian Evans-Pritchard, senior China economist for Capital Economics. But the outlook for the offshore bond payment still remains “uncertain” and Evergrande is “a long way from resolving its problems,” he added.
“We will see Evergrande make more defaults. Even if it avoids defaulting today, the situation is not getting better, unless the government steps in,” Evans-Pritchard said.
Even if Evergrande failed to make the $83.5 million bond payment on Thursday, it may still have some time. The company has a 30-day grace period before “officially defaulting,” wrote Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, in a research note this week.
But any missed deadline will fuel investor anxiety over the viability of the company.
Evergrande is stumbling under $300 billion worth of debt, which is widely held by Chinese financial institutions, retail investors, home buyers and its suppliers in construction, materials and design industries. Foreign investors also hold some of its debt. Over the past few weeks, the company warned investors twice that it could default if it’s unable to raise money quickly.
Will Beijing bail Evergrande out?
“We don’t expect government actions to help Evergrande unless systemic stability is at risk,” said S&P Global Ratings analysts in a research report earlier this week. “A government bailout would undermine the campaign to instill greater financial discipline in the property sector.”
Instead of a bailout, the analysts expected the government’s focus to be on guiding Evergrande through an orderly debt restructuring or bankruptcy process, while facilitating negotiations and funding to ensure small investors and home buyers are protected “as much as possible.”
Only if contagion from Evergrande were to cause other large developers to fail, would the government step in directly, they added. But they believe the hit to the financial system from Evergrande alone will still be “manageable.”
Macquarie Group’s economists, meanwhile, also don’t think a “wholesale bailout” of Evergrande is likely.
“The government would make sure that the pre-sold apartments get done and delivered to homebuyers,” they said, though they added that shareholders and lenders could “take a big loss.”
However, Beijing will be keen to avoid any escalation in protests mounted recently by investors and apartment owners, who gathered outside Evergrande’s headquarters in Shenzhen to demand their money back.
Evergrande’s troubles have been brewing for a while. In recent years, debts ballooned as it borrowed to finance its various businesses, from housing and electric vehicles to sports and theme parks. Then, in August 2020, Beijing started reining in the property sector’s excessive borrowing in an attempt to prevent the housing market from overheating and to curb debt growth.
In the past few weeks, Evergrande’s liquidity crisis has intensified, triggering a further plunge in the company’s stocks and bonds.
The need to “soften the blow” for small investors will likely be the focus of any restructuring of Evergrande, according to Robert Carnell, head of research for Asia-Pacific at ING Economics.