Evergrande plunged as much as 10.2% to its lowest in over 11 years as investors doubt the developer with $305 billion of liabilities can pay $83.5 million interest on September 23 for its March 2022 bond. Other large Hong Kong property stocks such as New World Development and Henderson Land were also seeing double-figure drops in their prices on Monday. Some analysts compare the current situation to the Lehman brothers debacle that happened 13 years ago and sent markets around the world careening out of control. Now, as default appears all but inevitable, trading floors across the world are gripped by fears that the bloodbath could cross China's borders, with investors already on red alert over spiking wholesale gas costs. On the other hand, some investors expect the Chinese authorities to adopt a similar approach to Mario Draghi in 2012, who gave his famous "Whatever it takes" and that Evergrande will be bailed out. However this would be an unwillingly signal a kind of acceptance, or even encouragement, of risky behavior. Looking at the recent actions this may not be a signal China wants to send as it has been trying to reduce high levels of debt in its real estate sector, implementing strict new rules on how developers find financing. Also it is hard to believe that the Chinese government will allow the situation to spin out of control. If Evergrande announces bankruptcy and has its debt restructured, then Beijing will most likely help the banking sector, since state-owned banks are among Evergrand's biggest creditors. Meanwhile private investors will take a bigger hit together with the 1.7 million people who have deposited down-payments for Evergrande homes that may never be built. Recent reports suggest that regulators in China are encouraging major lenders to extend the repayment periods for Evergrande or the debt rollover.
So what is worth paying attention to in the coming days? The key will be the above-mentioned interest payment (Thursday), as well as the reaction (or lack of reaction) from the Chinese authorities. It is also worth following the situation on the CDS (credit default swap) market in relation to the largest Evergrande lenders. At the moment, we can see some concerns in the case of the HSBC bank, but the CDS market does not indicate a state of panic yet.
The cost of 5-year CDS instruments for HSBC today increased by 16%, but the current levels do not indicate panic in the market yet. In the coming days, it will be worth monitoring investors' perception of the credit risk of Evergrande's largest creditors. Source: Bloomberg
