For all the warnings earlier this year that China Evergrande Group’s debt crisis would become the country’s Lehman moment, the developer’s landmark payment failure is barely registering in local financial markets.
The CSI 300 Index of stocks on Wednesday climbed to a six-week high, while Chinese junk dollar bonds rose 2 cents on the dollar, according to traders. The yuan strengthened to its highest level since May 2018. The risk-on mood continued even as bondholders of an Evergrande unit had yet to receive overdue interest payments.
Beijing has helped cushion the blow. A reserve-ratio cut announced by the central bank on December 6 and signalling from the Politburo that more easing was on the way injected confidence into China’s moribund financial markets. Signs that the state is taking a bigger role in Evergrande’s future, including a potential debt restructuring, may also have eased investor concern of a disorderly collapse. The company said state representatives have taken the majority of seats on a new risk management committee.
“As Evergrande has formally started its managed restructuring since last week, there is a need of much enhanced policy support in order to prevent the Evergrande default from deteriorating a deep property market slump,” Citigroup analysts led by Li-Gang Liu wrote in a note.
There’s still plenty for credit traders to be concerned about. Holders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet. Kaisa Group Holdings Ltd which has $11.6 billion in outstanding dollar debt, may have failed to repay a $400 million dollar bond that was due. The stressed developer halted trading in its shares on Wednesday.
S&P Global Ratings says more developers may need to restructure their debt. The yield on junk dollar bonds remains high at about 22%, making it near-impossible for cash-strapped developers to refinance, while a slowdown in the housing market has cut
demand for real estate.
Yet authorities appear to have accomplished their goal of teaching debt-bloated companies and the foreign investors who bankrolled them a lesson without crashing the nation’s financial markets. As with China Huarong Asset Management Co. earlier in the year, Beijing has challenged the assumption that some companies are too big to fail and forced the creditors to take a closer look at corporate finances.
“With large marked-to-market losses suffered already and low expectations of recovery, the eventual default of Evergrande would not be a surprise to the market and won’t trigger further panic,” said Abhishek Rawat, portfolio manager at Hong Kong Asset Management Ltd. “The arduous task of debt restructuring lies ahead and it remains to be seen how offshore creditors will be treated in the process.”