Chinese real estate behemoth Evergrande is facing a crucial deadline to pay an $83.5 million interest payment due today amid fears that it could default on its $300 billion debt and plunge the world into financial chaos.
Shares in the property firm have lurched wildly this week and trading floors in London and New York have been plagued by jitters over a ‘Lehman Brothers-style’ meltdown.
Shredded nerves have today ignited blazing sales in a $428 billion section of the Asian debt market, proving that the crisis at Evergrande has spread to other assets.
It is expected that the company will fail to meet the colossal payment to foreign bond holders today which will then start a 30-day countdown to an official default.
If this happens it would prompt China’s largest-ever debt restructuring and Beijing could be forced to intervene to contain the fallout on the broader economy.
There are grave concerns that this would then strike at the heart of global markets as international asset managers have sought out China’s lucrative returns because global bond yields have diminished so severely in the last decade.
‘Right now, as far as I understand, the view offshore, outside China, including Hong Kong and the UK, is near panic about China,’ said Stephen Jen, chief executive at Eurizon SLJ Asset Management.
Shares in Evergrande have lurched wildly this week and trading floors in London and New York have been plagued by concerns of a ‘Lehman Brothers-style’ meltdown (pictured: the company headquarters in Shenzen, Guangdong Province)
London showed less nerves this morning with the FTSE ticking up about half a per cent, although there still remain grave fears over the Chinese market
The Dow Jones was more optimistic today, up around 1 per cent in early trading. However, there are still looming doubts over Evergrande
He told The Financial Times: ‘It’s a culmination of all these surprising regulatory measures that have hit the market.’
Another fund manager based in London told the paper his phone had been ringing off the hook about exposure to Evergrande.
The volatility sparked a cryptocurrency ‘bloodbath’ with more than $340 billion wiped off the face of the market on Monday night as Bitcoin, Ethereum and Cardano prices dived.
The crisis emerged in part because of Beijing’s wider crackdown on lending by Chinese real estate firms, the predominant issuers of dollar-denominated high-yield debt in Asia.
Noel Quinn, HSBC chief executive, told a Bank of America conference on Wednesday that it would be ‘naive to think that the turmoil in the [property] market doesn’t have the potential to have second-order and third-order impact … particularly on the capital markets and the bond markets.’
Evergrande said that another domestic bond repayment which had also been due today had been had been ‘resolved through off-exchange negotiations.’
That turns the focus to the offshore repayment of $83.5 million which, at the time of publication, remained unclear whether it could meet.
Markets will be waiting until this has been made before there is any ‘greater conviction on easing contagion risks,’ said Yeap Jun Rong, market strategist for IG Group, in a research report on Thursday.
If it cannot meet the payment then it will still have some time, with a 30-day grace period before ‘officially defaulting,’ according to Jeffrey Halley, senior market analyst for Asia Pacific at Oanda.
Nevertheless, traders in London and New York were filled with more optimism today than earlier this week, in part due to an announcement by the Federal Reserve to taper its massive bond-buying.
Hong Kong rose more than one per cent, with Evergrande surging about 30 per cent briefly before easing back slightly – though its shares are still down more than 80 per cent this year.
There were also gains for other property developers as well as banks that have exposure to the firm.
Sydney also added one per cent, with Mumbai and Singapore were up even more. Shanghai, Wellington, Taipei, Manila, Bangkok and Jakarta were also higher. Tokyo was closed for a holiday.
In Europe, London, Paris and Frankfurt all rose at the open.
The positive start to the day followed a rally of around one per cent for all three main Wall Street indexes, where investors also welcomed a Fed statement on tapering its vast bond-buying programme.
The central bank said it expects to ‘soon’ be ready to start the wind-down of stimulus put in place at the start of the pandemic that has been a key driver of the global economic and equity rebound.
The world’s biggest economy was now strong enough to slow its bond-buying programme ‘if progress continues broadly as expected’, it said in a statement after its policy meeting.
Evergrande’s Cultural Tourism City in Suzhou. Construction works have been halted by chaos at the firm
‘The Fed has officially given notice that if the recovery continues as planned, a moderation in the pace of asset purchases can happen soon,’ said Oanda’s Edward Moya, adding that investors ‘can now completely price in a formal November taper announcement with a December start date’.
He said traders were cheered as ‘the Fed has well telegraphed that they were nearing a taper announcement and continue to show they are in no rush to deliver interest rate hikes’.
‘The biggest risk to the stock market is an accelerated pace of tightening and the Fed is showing that is something they will avoid unless they were dead wrong about inflation.’
However, bank boss Jerome Powell warned US lawmakers to lift the country’s debt ceiling so as to avoid the government running out of cash and failing to service its debt obligations, which could lead to a default and spark a financial crisis.
‘It’s just very important that the debt ceiling be raised in a timely fashion so the United States can pay its bills when it comes due,’ he said. Not paying is ‘just not something we can contemplate’.
His comments were backed by a group of former finance ministers – who served under presidents Jimmy Carter, George W. Bush, Bill Clinton and Barack Obama – who told leaders of both parties that even a short-lived default could threaten growth.
‘It creates the risk of roiling markets, and of sapping economic confidence, and it would prevent Americans from receiving vital services,’ they warned.
On oil markets, both main contracts built on a two-day rally after data showed US stockpiles at their lowest since 2018, lifting demand optimism, even as the Delta Covid variant continues to course through populations, sending infections spiking.