With an interest payment deadline passing without any statement from the property behemoth China Evergrande on Friday raised fears of the beleaguered Chinese firm edging closer to the probable default that investors dread. The huge debt of the company has kept markets and investors on the edge,
The business owes $305 billion and is cash-strapped, and investors are concerned that a collapse would pose systemic dangers to China's financial system and have repercussions throughout the world.
Evergrande made no comment or showed any evidence of paying investors after a deadline for paying $83.5 million in bond interest passed. The company is now in unknown territory and has a 30-day grace period. If that deadline passes without payment, it will default.
"These are periods of eerie silence as no one wants to take massive risks at this stage," said Howe Chung Wan, head of Asia fixed income at Principal Global Investors in Singapore.
"There's no precedent to this at the size of Evergrande ... we have to see in the next ten days or so, before China goes into holiday, how this is going to play out."
On Friday, China's central bank pumped cash into the banking system once more, sending a signal of support to markets. However, officials have been mute about Evergrande's plight, and China's state media has provided no hints about a rescue plan.
Evergrande hired financial consultants and issued a default warning last week, and global markets plummeted on Monday over worries of contagion, but they have since stabilized.
The problem for officials is how hard they can enforce financial discipline without inciting social discontent, given that a catastrophic collapse at Evergrande might smash a housing market that amounts for 40 per cent of Chinese family wealth.
Protests by unhappy suppliers, house purchasers, and investors this week demonstrated a level of dissatisfaction that may escalate if a default causes crises at other projects.
Evergrande has committed to prioritize such investors, and one coupon payment on a domestic bond was addressed this week. However, nothing has been mentioned about the offshore interest payment due on Thursday or the $47.5 million payment due next week.
Bondholders are beginning to believe it will be a month or more before things become clearer, and markets have already anticipated they will suffer a significant hit.
"Current market pricing estimates that investors in Evergrande's dollar bonds are likely to recover very little," said Jennifer James, a portfolio manager, and lead emerging markets analyst at Janus Henderson Investors.
"The likeliest outcome is that the company will engage with creditors to come up with a restructuring agreement," she said, warning that if such a deal is mismanaged "the loss of confidence could have contagion effects".
After Evergrande's problems caused a dramatic selloff, global markets have begun to rebound, trading on the assumption that the crisis may be handled.
Only about $20 billion of Evergrande's debts are owed outside of the country. However, the dangers at home are significant because of the threats to China's property industry, which is a large reservoir of wealth.
"Housing sales and investments could inevitably slow further - this would knock nearly 1 percentage point off GDP growth," analysts at Societe Generale said in a note.
"The longer policymakers wait before acting, the higher the hard-landing risk."
So far, there has been little evidence of official intervention. The People's Bank of China's 270 billion yuan ($42 billion) cash injection this week is the highest weekly total since January, and it has helped to keep markets under check.
According to Bloomberg Law, regulators have asked Evergrande to avoid a near-term default, citing unnamed sources familiar with the situation.
According to the Wall Street Journal, citing anonymous sources, authorities have ordered local governments to brace for Evergrande's demise.
"Given the deliberate pace of Chinese policy making, the authorities may well choose to play for time," said Wei-Liang Chang, a macro strategist at DBS Bank in Singapore.
(Source:www.todayonline.com)
The business owes $305 billion and is cash-strapped, and investors are concerned that a collapse would pose systemic dangers to China's financial system and have repercussions throughout the world.
Evergrande made no comment or showed any evidence of paying investors after a deadline for paying $83.5 million in bond interest passed. The company is now in unknown territory and has a 30-day grace period. If that deadline passes without payment, it will default.
"These are periods of eerie silence as no one wants to take massive risks at this stage," said Howe Chung Wan, head of Asia fixed income at Principal Global Investors in Singapore.
"There's no precedent to this at the size of Evergrande ... we have to see in the next ten days or so, before China goes into holiday, how this is going to play out."
On Friday, China's central bank pumped cash into the banking system once more, sending a signal of support to markets. However, officials have been mute about Evergrande's plight, and China's state media has provided no hints about a rescue plan.
Evergrande hired financial consultants and issued a default warning last week, and global markets plummeted on Monday over worries of contagion, but they have since stabilized.
The problem for officials is how hard they can enforce financial discipline without inciting social discontent, given that a catastrophic collapse at Evergrande might smash a housing market that amounts for 40 per cent of Chinese family wealth.
Protests by unhappy suppliers, house purchasers, and investors this week demonstrated a level of dissatisfaction that may escalate if a default causes crises at other projects.
Evergrande has committed to prioritize such investors, and one coupon payment on a domestic bond was addressed this week. However, nothing has been mentioned about the offshore interest payment due on Thursday or the $47.5 million payment due next week.
Bondholders are beginning to believe it will be a month or more before things become clearer, and markets have already anticipated they will suffer a significant hit.
"Current market pricing estimates that investors in Evergrande's dollar bonds are likely to recover very little," said Jennifer James, a portfolio manager, and lead emerging markets analyst at Janus Henderson Investors.
"The likeliest outcome is that the company will engage with creditors to come up with a restructuring agreement," she said, warning that if such a deal is mismanaged "the loss of confidence could have contagion effects".
After Evergrande's problems caused a dramatic selloff, global markets have begun to rebound, trading on the assumption that the crisis may be handled.
Only about $20 billion of Evergrande's debts are owed outside of the country. However, the dangers at home are significant because of the threats to China's property industry, which is a large reservoir of wealth.
"Housing sales and investments could inevitably slow further - this would knock nearly 1 percentage point off GDP growth," analysts at Societe Generale said in a note.
"The longer policymakers wait before acting, the higher the hard-landing risk."
So far, there has been little evidence of official intervention. The People's Bank of China's 270 billion yuan ($42 billion) cash injection this week is the highest weekly total since January, and it has helped to keep markets under check.
According to Bloomberg Law, regulators have asked Evergrande to avoid a near-term default, citing unnamed sources familiar with the situation.
According to the Wall Street Journal, citing anonymous sources, authorities have ordered local governments to brace for Evergrande's demise.
"Given the deliberate pace of Chinese policy making, the authorities may well choose to play for time," said Wei-Liang Chang, a macro strategist at DBS Bank in Singapore.
(Source:www.todayonline.com)
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