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Investor Anxiety Over China's Debts Is Shown By The Evergrande Liquidation

Investor Anxiety Over China's Debts Is Shown By The Evergrande Liquidation
A protracted procedure for creditors has begun with a liquidation order for China's most indebted developer. This process is expected to reveal the extent of China's real estate market decline and prevent builders from accessing international loan markets as investors avoid risk.
On Monday, over two years after China Evergrande's default brought a years-long real estate boom to a shaky halt, a Hong Kong court appointed liquidators for the company opened a new tab.
With around $300 billion in liabilities, it is the most indebted developer in the world, with assets valued at $240 billion. Markets anticipate that owners of unfinished flats would be given priority and that foreign bondholders will suffer the greatest losses.
The sale or restructuring has wider implications for debt, real estate, and investor confidence as it takes place in the context of declining house values and an economic downturn that has driven equities markets to multi-year lows.
Debt for Evergrande is valued at less than two cents on the dollar, and the company's stock fell to a record low on Monday before being stopped.
By Tuesday, the recent surge in developer stocks had reversed, and China's No. 2 developer by sales, Vanke, saw a little decline in yuan notes to 79 yuan.
"Investors in this part of the market at this point are likely speculating as to who comes out of this relatively less damaged and which bonds are going to have better recovery rates," said Phil Wool, a co-portfolio manager of Rayliant's Quantamental China ETF.
"The fact that we're getting such a momentous headline and there's not a huge negative response in the market tells you how much negativity is baked into prices."
Though it's unknown, he suggested that a nice surprise would be Chinese authorities recognising and supporting the Hong Kong court judgement.
Meanwhile, the once-developer-dominated primary markets are also exhibiting a shocking lack of confidence.
According to statistics from Dealogic, China's total issuance of US dollars fell to $42.5 billion last year from pre-pandemic levels around $200 billion. Although paying off Evergrande's loans could assist, investors anticipate a protracted process.
According to Kamil Dimmich, a partner and portfolio manager at North of South Capital's emerging markets fund, "if the process is resolved in a fair and equitable manner for creditors, it should help restore Chinese firms' access to markets."
"More broadly unfinished properties may now be sold (or) assigned to developers with capacity to complete them and allow for deliveries to clients. This could over time help restore some confidence for homebuyers and remove a huge overhang."
The main obstacle to China's growth and the confidence of investors and consumers has been the property market's weakness, which is the result of the failure of Evergrande and other companies.
The mainland developers' Hang Seng index, which opens a new tab, fell to a record low last week. Analysts predict a wave of asset sales and reorganisations to maintain the pressure.
"The negotiation process of other developers' dollar debt restructuring may accelerate due to Evergrande's winding-up order," according to a letter to clients from John Lam, head of UBS's China and Hong Kong Property Research.
"Since the dollar restructuring programs announced so far have involved debt-to-equity options, this implies ... substantial equity dilution, a negative to equity price(s) for those defaulted developers."
In this industry, dollar bonds are priced with low expected returns for investors. Debt for Sunac China, opens new tab, with a restructuring plan authorised in October, is trading at 11 cents on the dollar and is due in 2027. Country Garden's defaulted obligations open a new tab that sells offshore assets for about 8.5 cents.
Indeed, concerns about a worldwide credit crunch or systemic collapse have subsided for the world's markets.
"The liabilities are being distributed in a million different ways throughout the Chinese financial system," said Leland Miller, chief executive of investor-focused analytics firm China Beige Book.
"China has a non-commercial financial system, which means it's not going to have a Lehman moment," he said.
Even with meticulous dismantling, Evergrande has caused a great deal of damage, and most investors are reluctant to work in China's real estate market—which formerly contributed about 25% of the country's GDP—until it is fixed.
"The main issue they still face is consumer confidence is not there as long as they don't really know what's going to happen with these unsold homes," said Thomas Rupf, chief investment officer for Asia and head of trading at VP Bank.
"The uncertainty for every consumer - you want the house you bought to be finished before you move on to recover."

Christopher J. Mitchell

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