Asian stocks mixed amid Evergrande uncertainty

Anxiety increases in response to possible global fallout of property giant’s liquidity crisis

Asian markets struggled to contend with the crisis engulfing Evergrande Group on Tuesday. The Chinese company is the most indebted real estate developer in the world, with total liabilities in the region of $300bn. 

Although concerns for the sustainability of the business have existed for some time, matters are expected to come to a head on Thursday when Evergrande is due to pay interest worth $83.5m on a five-year US dollar-denominated bond. 

The bond, which is due to mature in March 2022, was originally worth around $2bn, but has since plunged in value. At the same time, the yield on it hasit has jumped from 36% to 565% in a little over two months.

An interest payment of $47.5m on a seven-year US dollar-denominated bond is due next Wednesday.  

Default looms

If the company is unable to settle either interest payments within 30 days of the scheduled payment dates, it will default. 

Having struggled to raise further funds and having warned of sales declining yet further, Evergrande is widely expected to miss the payment dates, with S&P Global Ratings recently describing a default as “likely”. 

Wider impact

Although Evergrande chairman Hui Ka Yuan recently maintained in a letter to employees that they “will walk out of the darkness soon” if they “continue to fight and persevere through this struggle”, attention has already begun to shift away from the fate of the company and on to the possible contagion its complete collapse could wreak across the global economy. 

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This week, Société Générale increased its odds for an “extended, severe property-led slowdown” in the Chinese economy to 30%. 

Analysts at Barclays were far less fearful, dismissing comparisons between Evergrande and Lehman Brothers, whose collapse in 2008 presaged the Global Financial Crisis, as “not even close.”

Although admitting the likelihood of some “spillover on China’s property sector”, the bank argued: “One would need to see a lenders’ strike across large parts of the financial system, a sharp increase in credit distress away from the real-estate sector and banks being unwilling to face each other in the interbank funding market.”

Market reaction

The Shanghai Composite and Hang Seng indices closed marginally up on Tuesday, although they have fallen by 2.3% and 4.3% in the past five days of trading, respectively. 

With yuan-denominated bonds possibly set to take priority over dollar-denominated bonds,  institutional and foreign investors could bear most of the initial brunt of a potential collapse. 

Japan’s Nikkei 225 closed down by 2.17%, while India’s Nifty 50 was up by 0.95%. Evergrande itself closed 0.4% lower to HK$2.27 ($0.29), having fallen by 84% since the start of the year. 

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