China's Evergrande default risks spook investors

Global stocks sank on Monday amid fears that a possible collapse of beleaguered Chinese real estate company Evergrande could lead to a wave of defaults in China's bloated property market, risking a financial contagion in the world's second-largest economy.

Hong Kong's benchmark Hang Seng Index fell 3.3%, registering its biggest drop since July. The negative sentiment also spilled over into Europe where major indices including the DAX and FTSE were down. The offshore Chinese yuan fell to three-week lows, while the US dollar rose as investors sought a safe haven amid the uncertainty. Mainland Chinese markets were closed for a public holiday.

"Contagion risks from the Evergrande meltdown are the prime cause of today's sell-off," said Markets.com analyst Neil Wilson, speaking with news agency AFP. "It is definitely though a major cause for investor concern right now and it is possible we see further losses."

Mining shares also took a beating as investors weighed the impact of Evergrande's plight on China's economic growth.

"Evergrande ... appears to be teetering on the precipice with concerns about contagion from the situation infecting the wider economy in China," said AJ Bell analyst Russ Mould, speaking with Reuters. "Any downturn in China would have significant implications for commodities demand given its status as the world's largest consumer of many minerals and metals."

How did Evergrande shares perform?

Shares in Evergrande Group slumped to over 11-year lows, before closing down 10% at HK$2.28 ($0.29, €0.25). Shares in the company's property management and electric car units also took a major battering as the property giant struggles to raise the millions of dollars it needs to pay in interest to its lenders over the next few days.

"The [Evergrande] stock will continue to fall, because there's not yet a solution that appears to be helping the company to ease its liquidity stress, and there are still so many uncertainties about what the company will do in case of a restructuring," Kington Lin, managing director of Asset Management Department at Canfield Securities Limited, told Reuters.

Evergrande's share price could fall to below HK$1 if the company is forced to sell most of its assets in a restructuring, Lin said.

Six Evergrande executives illegally cashed in their investments just as the company's liquidity crunch became clear, the company admitted on Saturday.

How much is Evergrande due to pay this week?

The company is due to pay $83.5 million (€71.1 million) interest on Thursday for its March 2022 bond and another $47.5 million interest payment due on September 29 for March 2024 bonds. Both bonds would default if the real estate group fails to settle the interest within 30 days of the scheduled payment dates.

Evergrande, the world's most-indebted real estate company with over $300 billion in liabilities, said on Sunday it has begun repaying investors in its wealth management products with real estate.

One of Evergrande's main lenders has already provisioned for losses on a portion of its loans to the property group. Some other creditors are planning to give the firm more time to repay, Reuters news agency reported.

Chinese authorities have already told major creditors to extend interest payments or rollover loans.

What would be the global implications of Evergrande's collapse?

Investors are worried the possible collapse of the property behemoth poses major risks to China's financial stability and economic growth. Some analysts are even calling it China's Lehman Brothers moment, referring to the collapse of the US investment bank that marked the beginning of the global financial crisis in 2008.

"If as expected Evergrande is defaulting on its debt and goes through a restructuring, I don't see why it would be contained," said Michel Lowy of banking and asset management firm SC Lowy, speaking with Reuters. "There are other developers that are suffering from the same problem of no access to liquidity and have extended themselves too much."

Most other analysts have played down the comparison, arguing that even a messy collapse of the developer would have a minimal global impact.

"Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy," Simon MacAdam from Capital Economics wrote in a note. "In a hard landing scenario, several emerging markets are vulnerable. But in general, the global impact of swings in China is often overstated." 

ap/uhe (Reuters, AFP)