Fears are looming as the Evergrande crisis intensifies this week. The Chinese real estate developer is beginning to stretch its luck as it misses its third interest payment to bondholders. Although, some analysts believe the government is devising ways to conduct damage control on any fallout.
Despite the heightening troubles among China's property developers, the S&P/ASX 200 Index (ASX: XJO) is pushing upwards on Thursday. At the time of writing, the Aussie market is up 0.68% to 7,322.2 points.
Let's deconstruct the latest details in the Evergrande story.
Clipping the wings of a shaky industry
The Chinese property developer, Evergrande, has received its third strike. The company, which is strapped with a burdensome debt of more than $400 billion, was unable to fulfil its recent debt obligations according to bondholders. This included some bondholders not receiving coupon payments to the tune of US$148 million on April 2022, April 2023, and April 2024 notes.
For Evergrande, this means its grace period is nearing — and if it is unable to pay US$119 million by 23 October, it will default. This potential collapse has many investors around the globe concerned about spill-on impacts. However, analysts believe the Chinese government is planning on a controlled fall to mitigate widespread effects.
Commenting on this, managing director of Orient Capital Research Andrew Collier, stated:
What the government is doing is this kind of a managed reconstruction that is trying to scare the property market away from any further debt-fuelled growth by not bailing out Evergrande.
For instance, Beijing is nudging the banks to release some cash to the property market now to provide padding to the property market. However, it all remains to be one complex balancing act. On the one hand, the government wants to tighten the belt on debt-fuelled property speculation. While on the other, China doesn't want the entire property sector to falter and bring down economic growth.
Bigger than Evergrande
While the media has its teeth deeply sunk into the Evergrande headline, the problems extend beyond the one developer.
This week, smaller developers Modern Land and Sinic Holdings have motioned to defer repayments due later this month. A request was made to the company's respective bondholders to delay the US$250 million (each) interest payment for an additional three months.
Investors will be keeping a close eye on these companies and Evergrande over the coming months. Until then, markets will likely exhibit continued volatility as uncertainty lingers.
