Commentary
The Evergrande insolvency crisis has had a reprieve, but there may be more to it than meets the eye—much more.
After trading for the company’s shares was halted on Sept. 31, the resumption of trading on Oct. 21 led to further declines in its stock price, falling from HK$2.95 to HK$2.58 per share. Evergrande’s stock price is down about
80 percent for the year.
Evidently, the market has little faith in the company’s ability to rally and meet its obligations. It has also triggered a
sell-off in other riskier Asian issuers of dollar-denominated bonds, driving yields near their
all-time highs. That’s understandable, given that almost 50 percent of all dollar-denominated bonds in China are in the real estate sector. If China’s second-largest real estate development firm’s risk is higher, other issuers will be as well, the
reasoning goes.
But that’s not all. Talks to sell controlling interest in Evergrande’s Property Services division to China-based Hopson Development Holdings for
HK$2.6 billion collapsed, contributing to its falling share price. Other attempts to raise cash through asset sales have also failed. Incidentally, after Hopson backed out of the deal, its stock price rose over 7.5 percent.
However, Chinese financial authorities insist that the risk is
manageable.
Are they correct?
It’s too soon to tell. According to China’s state media, Evergrande has made good on its
$83.5 billion interest payment for offshore bondholders one day before its grace period ended, preventing it from entering into default.
Does that mean that Evergrande is out of danger?
Probably not.
To many financial experts, Evergrande looks quite a bit like the Lehman Brothers crisis in 2008, only on a
smaller scale. That’s a fair point. We’ll revisit the Lehman Brothers question again in a moment.
But on the other side of that argument is the fact that Evergrande isn’t the only Chinese real estate firm on the brink of collapse. Some, such as Sinic Holdings and Fantasia Holdings Group, are
already in default, with many more development firms such as Kaisa Group Holdings (stock price down 40 percent), and Modern Land (trading halted as of Oct. 21) teetering on the edge as well.
What’s more, the biggest test will be in January, when more than
$5.2 billion in interest payments will be due from a menu of 15 heavily leveraged, smaller Chinese property development firms. That’s more than twice the amount of Evergrande’s current debt service payments.
Also, keep in mind that at this point,
domestic bondholders are still getting their interest payments. Chinese authorities are only threatening to stiff foreign (
dollar-denominated) bondholders—at least for the time being.
That brings up another, more salient point about these offshore dollar-denominated financial assets possibly going into default. Could it, at some point, trigger a wider crisis as pessimists fear?
A Lehman Brothers moment that triggers a stock market collapse could still happen, or perhaps a version of the
Asian property bubble burst of 1997 that temporarily clobbered stock prices here is possible.
And if a Lehman Brothers-type financial meltdown were imminent, would investors be made aware of it beforehand?
Or would retail investors be left holding the bag while savvy institutional investment houses and banks sell their holdings just before the event?
Another possible scenario may be related to the fact that the bonds are indeed dollar-denominated.
What if Evergrande’s debt and other dollar-denominated debt in China over-leveraged through sophisticated financial instruments such credit default swaps and other
derivatives that remain unseen at this moment?
Recall that in the 2008 financial crisis, it was those kinds of instruments that broke the financial system, requiring trillions in bank bailouts.
Unrelated companies were brought down with them as credit froze.
That presents a few questions, doesn’t it? For example, do we really know if the debt crisis is, in Beijing’s words, “manageable?”
Is there linkage to China companies listed on the U.S. stock exchanges? It all seems rather murky, as do Chinese authorities’ assurances.
Just as importantly, would China perform a bailout of Evergrande today if necessary?
If not, what impact would the collapse of dollar-denominated assets in China have on the U.S. dollar?
At this stage, it’s unclear just how extensive the damage could be in China or in the rest of the world. There are no guarantees that Chinese banking authorities are telling the truth, or would be able to contain the contagion that could be triggered.
That is, if they even wanted to.
The idea that Beijing would put the world at risk with a China-borne contagion—and use it to their advantage—just doesn’t seem so far-fetched anymore.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
