Asian stocks fall as Evergrande anxiety returns

Second prominent Chinese real estate developer warns of potential default

The majority of Asia’s leading indices closed down on Tuesday as anxiety over the potential collapse of Evergrande Group returned after a brief lull. 

At the start of the year, the Chinese government implemented new limits on the amount of debt property companies could take on. Evergrande, whose rapid expansion had been fuelled by substantial levels of leverage, has since struggled to hold its head above water. 

With liabilities above $300bn and unable to fill empty developments, Evergrande’s stock price has fallen by 79% since the start of the year. 

The company’s inability to settle the interest payments on two dollar-denominated bonds by the arranged deadline (the end of September) has heightened fears of an impending default. The company has 30 days to make good on its obligations to avoid such an outcome. 

The wider market sell-off triggered by the mounting anxiety over the outcome was partially arrested in the short term by Evergrande’s settlement of a domestic interest payment and liquidity injections administered by the People’s Bank of China (PBoC). 

However, these fears have resumed after Evergrande failed to settle a third successive offshore interest payment this week. 

Indication of wider market weakness?

With a default becoming more and more a matter of when, not if, China’s $5trn bond market has become increasingly jittery. 

Adding to fears that Evergrande’s problems reflect a wider issue within the Chinese property market and are not entirely sui generis, on Monday another prominent developer, Modern Land, asked creditors for added time to repay corporate bonds. 

The developer asked investors to delay the maturity date of a $183m bond from 25 October to 25 January to “avoid any potential payment default”.

By Tuesday’s close, Hong Kong’s Hang Seng Index and Shanghai’s Composite Index had closed down by 1.4% and 1.2%, respectively. The KOSPI Index also traded 1.3% lower, while the Nikkei 225 Index fell by 0.9%.

 

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