Analysis: Investors brace for sharp drop in China

LONDON, Sept. 16 (Reuters) – International investors who have crammed into China in recent years are now bracing for one of its big drops as problems with over-indebted real estate giant China Evergrande come to a head.

Developer woes (3333.HK) have been snowballing since May. The decrease in resources against 2,000 billion yuan ($ 305 billion) in liabilities wiped out nearly 80% of its stock and bond prices, and a bond coupon payment of $ 80 million is now looming next week. Read more

What happens then is not clear. Bankers said he would most likely miss the payment and get into some sort of suspended animation where authorities step in and sell some of his assets, but it could easily get messy.

“We’ll have to see what happens,” said Sid Dahiya, head of emerging market corporate bonds at abrdn, formerly Aberdeen Standard, in London, which owns a small portion of the bonds.

“They’re probably working on a deal in the background, but we don’t have any clarity and we don’t really have any precedents, so it’s unexplored water.”

Evergrande warned just over two weeks ago that he risked defaulting on his debt if he failed to raise funds. Since then, he said no progress has been made in these efforts.

Analysts say the big picture is that if Evergrande – which has more than 1,300 real estate projects in more than 280 cities – collapses, it will firmly dispel the idea that some Chinese companies are too big and fail.

That would likely still apply to large state-linked companies, of course, but it also comes after Beijing’s crackdown on big tech companies like Alibaba and Tencent wiped out nearly $ 1 trillion of its money. markets earlier in the year. Read more

Evergrande’s contagion was largely confined to other heavily leveraged ‘high yield’ Chinese firms that also collapsed, but Hong Kong heavyweight Hang Seng (.HSI) also hit a 10-month low on Thursday, showing that there is a certain gap.

Large global funds are also involved. EMAXX data shows that Amundi, Europe’s largest asset manager, was the largest global holder of Evergrande’s international bonds, although it is likely that it has sold at least some before that things don’t really go wrong.

The Paris-headquartered company had just under $ 93 million of a $ 625 million bond to repay in June 2025, according to EMAXX data. UBS Asset Management was the second holder of this issue with $ 85 million as well as the second overall holder.

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In April, these bonds were trading around 90 cents to the dollar, now they are closer to 25 cents.

“It has always been rated as a risky, high-yield investment, but what the prices are telling you today is that there was some surprise the government was letting it go completely.” US Aegon fund emerging market debt manager Jeff Grills said.

He added that this was an example of a textbook where investors were drawn to the 10% interest rate plus bonds provided.

According to the letter Evergrande sent to the Chinese government late last year, its commitments relate to more than 128 banks and more than 120 other types of institutions.

A group of Evergrande bondholders has chosen investment bank Moelis & Co and law firm Kirkland & Ellis as advisers on a possible restructuring of a tranche of bonds, said two sources familiar with the matter. Read more

Other funds also exposed to bonds include the world’s largest asset manager BlackRock, as well as dozens of others such as Fidelity, Goldman Sachs Asset Management and PIMCO.

Major U.S. financial firms, including BlackRock and Goldman, as well as Blackstone, are due to meet with officials from China’s central bank and its banking and stock regulators later Thursday.

Debt analysts hope the damage may not be too extensive. The holdings are tiny compared to the overall size of these large investment firms. Additionally, only $ 6.75 billion of Evergrande’s nearly $ 20 billion of debt is included in JPMorgan’s CEMBI index that corporate debt buyers in large emerging markets use as a sort of checklist. races.

Others are still wary of the larger signal it sends.

“This is part of a self-reinforcing dynamic in which increasing insolvency risk triggers costs of financial distress, which in turn increase insolvency risk,” said Michael Pettis, senior non-executive investigator. -resident of the Carnegie-Tsinghua Center for Global Policy, on Twitter.

“Until regulators step in and credibly deal with the risk of insolvency at all levels, conditions are likely only to deteriorate.”

Some seasoned emerging market crisis watchers also believe that the problems are yet to last.

“This unwinding hasn’t even really started,” said Hans Humes of emerging debt-focused hedge fund Greylock Capital.

Additional reporting by Rodrigo Campos and Herb Lash in New York; edited by David Evans

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