China’s Evergrande shares listed in Hong Kong plunged as much as 7% on Tuesday, after falling 10% the day before, on fears that the company’s $305 billion in debt would cause massive losses in China’s financial system if it collapsed.
The Hong Kong stock exchange was closed for a holiday on Wednesday. According to Refinitiv data, Hengda Real Estate’s coupon payment totals 232 million yuan ($35.88 million).
Since September 16, when Hengda Real Estate requested a one-day suspension of trading in Evergrande’s onshore exchange-traded bonds, trading has been halted.
While trading technically restarted on September 17, it is now only done through negotiated transactions in an effort to reduce volatility, according to traders.
While fears of a dramatic collapse roiled markets on Monday, U.S. stocks were flat on Tuesday, while Chinese stocks opened substantially lower following a two-day public holiday.
China’s property index, on the other hand, recovered its losses and was up over 3%, while banking equities were down almost 3%.
Fears of contagion have kept financial markets on pins and needles since Evergrande is so tightly connected with China’s broader economy – from retail investors to infrastructure-related enterprises that serve as a gauge for global commodities demand.
“There’s been a fair bit of concern about the possibility of contagion,” analysts at New York-based Bespoke wrote in a research note on Tuesday. “But so far that concern isn’t showing up in parts of the credit markets that have served well as red flags for broader credit crunches in the past.”
China’s Evergrande will pay its onshore bond on time, but the developer hasn’t said whether it would be able to pay the $83.5 million in interest due on its March 2022 bond on Thursday.
It owes another $47.5 million in March 2024 notes, which is due on Sept. 29. Both bonds will default if Evergrande fails to pay the interest within 30 days of the due date.
Bloomberg reported on Tuesday that Evergrande skipped interest payments due Monday to at least two of its top bank creditors, citing people familiar with the situation.
According to Bloomberg, the missed payments were predicted because China’s housing government stated that the company would be unable to pay on time.
As investors and policymakers around the world tried to assess the potential consequences, Securities and Exchange Commission (SEC) Chair Gary Gensler said the US market is better positioned to absorb a potential global shock from a major company default than it was before the financial crisis of 2007-2009.
When Fed Chair Jerome Powell speaks after the Fed’s two-day meeting, which ends on Wednesday, he will almost certainly be asked about the Evergrande repercussions.
Despite the impending default, some funds have recently increased their holdings. According to Morningstar data and a blog post, fund giant BlackRock and investment banks HSBC and UBS were among the major buyers of Evergrande’s debt.
UBS Asset Management and Amundi, Europe’s largest asset manager, are among the bondholders.
S&P Global Ratings said on Monday that it believes the Chinese government will only intervene if a wide-ranging contagion threatens the economy’s fundamental stability.
“I would characterise Evergrande as a telegraphed and controlled detonation,” said Samy Muaddi, the portfolio manager of the $5.1 billion T. Rowe Price Emerging Markets Bond fund, which does not have a position in the company.
China’s Evergrande debt of $300 billion is financed by bank loans, implying that the Chinese financial system will be able to absorb any possible bad defaults.
“We do not have any direct lending exposure to Evergrande; our indirect exposure through counterparty credit risk is small and with no single significant concentration,” Citigroup spokesperson Danielle Romero-Apsilos said in an email on Tuesday. She declined to comment on Evergrande’s scheduled payments.
According to veteran banker Uday Kotak, the crisis at the group is like “China’s Lehman moment.” The Chief Executive Officer of Kotak Mahindra Bank also stated that the current situation at Evergrande reminded us of the IL & FS crisis.
