Intensifying concern over the impact of a China Evergrande Group default is rippling through the nation’s financial markets.
Developers led declines on the Hang Seng China Enterprises Index, with Country Garden Holdings Co – the nation’s largest developer by sales – losing 7.2% and Sunac China Holdings Ltd. sinking 11%. This week alone the two stocks have fallen more than 21%. China’s high-yield dollar bonds fell as much as 4 cents on the dollar Thursday, according to credit traders, with those issued by Fantasia Holdings Group Co – a weaker-rated developer – down about 10 cents.
Yields on China’s junk notes have climbed to an 18-month high, according to a Bloomberg index. In Shanghai, bank stocks suffered their fastest selloff in seven weeks.
“It’s not just the real estate sector – overall sentiment is quite fragile,” Elizabeth Kwik, Aberdeen Standard Investments Asian equities investment manager, said on Bloomberg Television.
The outlook for Evergrande is deteriorating by the day. Evergrande’s onshore unit halted trading in all bonds on Thursday after a domestic credit assessor cut its rating. S&P Global Ratings also downgraded the developer, saying its liquidity and funding access “are shrinking severely.” Earlier this week, Chinese authorities told major lenders not to expect an interest payment from the firm due September 20, according to people familiar with the matter. That came after Evergrande hired advisers for what could be one of the country’s largest-ever debt restructurings.
Investors are increasingly losing confidence.
Some holders of Evergrande’s offshore bonds have recently chosen legal and financial representatives, Reorg reported on Thursday. One major shareholder sold more of the company’s stock, a filing showed.
Broader signs of stress in the banking system are less apparent. Interbank lending rates remain near averages, showing sufficient liquidity in money markets. But some banks in China appear to be hoarding yuan at the highest cost in almost four years, a sign they may be preparing for what a Mizuho Financial Group Inc strategist called a “liquidity squeeze in crisis mode.”
Bank loans and other borrowings from firms including trusts accounted for about 81% of Evergrande’s 335.5bn yuan ($52bn) of interest-bearing debt coming due in 2021.
Top lenders include China Minsheng Banking Corp, Agricultural Bank of China Ltd and Industrial & Commercial Bank of China Ltd. In a statement late Monday, Evergrande said rumours that it will go bankrupt are untrue.
Next week will be a litmus test for the company. Evergrande is scheduled to make interest payments due September 23 of $83.5mn for a dollar note and 232 million yuan for a local note, Bloomberg-compiled data show.
Softness in the housing market – which comprises about 28% of China’s economy – is becoming more evident. Data Wednesday showed home sales by value slumped 20% in August from a year earlier, the biggest drop since the onset of the coronavirus early last year. Responding to a question on Evergrande’s potential impact on the economy, National Bureau of Statistics spokesman Fu Linghui said some large property enterprises are running into difficulties and the fallout “remains to be seen.”
Economists have warned that China is squeezing its property market too far in its quest to avoid bubbles.
China’s current priorities of promoting common prosperity and deterring excessive risk-taking mean there’s unlikely to be any easing of curbs this year, according to Macquarie Group Ltd. The property sector will be a “main growth headwind” for next year, although policy makers may loosen restrictions to defend 5% GDP expansion, Macquarie analysts wrote in a Wednesday note.
The central bank on Wednesday rolled over maturing loans to banks rather than adding more liquidity, a sign that Chinese authorities see no need to inject more support into the financial system.
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