China avoids Evergrande blowup for now, but rocky road lies ahead



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The Chinese government worries that Evergrande’s debt crisis could pose systemic risks.   © Reuters

NORIYUKI DOI, Nikkei staff writer | China

SHANGHAI — The threat of an immediate default by China Evergrande Group receded Wednesday with a pledge by the troubled property developer to meet a key bond obligation, but the risks to China’s economy are far from over.

Evergrande said Wednesday that it will make a 232 million yuan payment ($35.9 million) on yuan-denominated debt due Thursday. While has not stated whether it will pay $83.53 million in interest on a dollar bond due the same day, it has a 30-day grace period if it misses this deadline.

In a letter to employees Tuesday for the Mid-Autumn Festival, founder and Chairman Xu Jiayin expressed confidence that Evergrande can “emerge out of the darkness.”

Evergrande’s reprieve is good news for the Chinese government, which has made clear that heading off financial turmoil is its priority for now, but also wants to avoid a bailout that could muddy its “common prosperity” message.

The real test of Evergrande’s cash flow situation comes next year, when $7.6 billion in debt across six bonds is set to mature. Yields on this debt have skyrocketed to between 320% and 560%, making a rollover into new bonds difficult.

Because they are spread out among a wide base, the dollar bonds themselves pose a limited risk to investors in and of themselves. 

But Evergrande has warned that missing payments on one bond could lead to “cross default,” which occurs when other issues are considered to be in arrears after one defaults.

A corporate credit crunch sparking trouble at financial institutions, potentially freezing up money flows beyond the real estate sector, is a scenario that President Xi Jinping’s government desperately wants to avoid.

The Evergrande situation could pose such risks. The developer is the top shareholder of Shengjing Bank, based in Liaoning Province. The bank has 1 trillion yuan in assets but only about 80 billion yuan in capital.

While there has been no public disclosure of transactions between the companies, a Chinese credit ratings agency downgraded Shengjing Bank in late July, citing an overconcentration of risk as a factor. Credit to a single customer accounts for a larger share of its capitl than regulatory limits allow, the agency said.

Resolving risks to the financial system was on the agenda of a meeting last month of the Chinese Communist Party’s Central Financial and Economic Affairs Commission, alongside the common prosperity push. While Beijing intends to allow some defaults, it aims to stave off broader crises such as bank runs or cascading bank failures.

Chinese financial markets’ response to the Evergrande turmoil is muted for now. The overnight Shanghai Interbank Offered Rate, or Shibor, remains in the low 2% range.

Chinese authorities are known for injecting public funds into failing banks to keep the financial system stable. Beijing last year allowed 200 billion yuan in proceeds from infrastructure bonds issued by regional governments to be used to shore up struggling small banks.

But with Evergrande, the government is in a tricky position. Under its common prosperity drive to redistribute income from the wealthy, the real estate industry, a major target of speculative investment, faces strict regulations on borrowing and selling prices.

The impact of defaults by HNA Group and Tsinghua Unigroup was limited, as both companies entered bankruptcy restructuring. But should Evergrande — with its $19.5 billion in dollar debt alone — cause a financial shock, the consequences could be global.

“We do not expect the government to provide any direct support to Evergrande,” S&P Global said Monday. “We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy.”

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