Market players brace for what could be one of China’s biggest debt restructurings

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Growing investor anxiety over China’s real estate crackdown spilled over into markets on Monday, adding pressure on Xi Jinping’s government to prevent financial contagion from destabilizing the world’s second-largest economy.

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Hong Kong’s real estate giants, including Henderson Land Development Co., suffered the biggest liquidation in more than a year, with traders speculating that China would extend its real estate crackdown to the financial hub. Contagion fears from China’s Evergrande group have intensified, spiking everything from bank stocks to Ping An Insurance Group Co. and high yield dollar bonds. A little-known Chinese real estate developer plunged 87% before the stock halted.

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Hong Kong’s benchmark Hang Seng fell 3.3%, its biggest loss since late July. The sales have also trickled down to the Hong Kong dollar, offshore yuan and futures contracts on the S&P 500 index. Holiday closings in much of Asia may have exacerbated volatility, said traders.

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Faced with uncertainty as to how far Xi is willing to go in his market turmoil campaigns to achieve “common prosperity” and curb over-leveraged companies, many investors choose to sell first and ask. questions later. The interest payment deadlines this week on several Evergrande bank bonds and loans add another layer of risk as market participants brace for what could be one of China’s biggest debt restructurings.

“The price movement in several asset classes in Asia is horrific today due to growing fears over Evergrande and a few other issues, but it could be an overreaction due to all the market closures,” said Brian Quartarolo, portfolio manager at Pilgrim Partners Asia. .

Xi faces a delicate balance as he tries to reduce debt in the real estate sector and make housing more affordable without causing too much short-term damage to the financial system and the economy. Growing concerns that it will miscalculate are spreading more and more beyond China-focused real estate developers and their suppliers.

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“It’s what the Chinese would describe as trying to descend from a tiger,” said Justin Tang, head of Asian research at United First Partners.

Chinese policymakers may be able to avert a financial crisis, but the Evergrande ordeal could still inflict lasting damage to credit conditions and the economy, Societe Generale SA analysts wrote in a note on Monday.

“The repercussions of the potential collapse of Evergrande will likely contribute to China’s current economic deceleration, which in turn anchors global growth and inflation and casts a veil on commodity prices,” the analysts wrote. led by Phoenix Kalen, Head of Emerging Markets Strategy in London.

Hong Kong real estate companies were the main victims of the sale on Monday, with the Hang Seng real estate index falling 6.7% for its biggest drop since May 2020. Henderson Land plunged 13% and Sun Hung Kai Properties Ltd. sank 10%, the most since 2012.

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Chinese officials have told developers in Hong Kong that Beijing is no longer willing to tolerate what it calls monopoly behavior, Reuters reported on Friday. Officials have not established a roadmap or deadline, according to Reuters, which cited unidentified developers.

The Hong Kong government has long struggled to keep house prices under control amid excessive demand, limited supply and low borrowing costs. The city’s average property value was $ 1.25 million globally in June 2020, according to CBRE Group Inc.

“This is a paradigm shift,” said Hao Hong, chief strategist at Bocom International, referring to the Reuters report. “People have to watch closely. “

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Ping An Insurance fell 5.8% to a more than four-year low on concerns over its exposure to the real estate sector. The company issued a statement Friday saying its insurance funds had “no exposure” to Evergrande and other real estate companies “to which the market has paid attention.” Real estate accounts for about 4.9% of Ping An Insurance’s investments, compared to an average of 3.2% for its peers, according to Bloomberg Intelligence.

In credit markets, the average price of high-yielding dollar notes by Chinese borrowers slipped about 2 cents on Monday, the worst drop in about a year. This pushed prices down in the larger Asian junk bond market by 1 to 2 cents, traders said. Even debt with investment grade ratings has been pitted. Performance bonuses on tickets from Country Garden Holdings Co., China’s largest developer by sales, hit a record high.

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The Hong Kong dollar fell to its lowest level this month, while the offshore yuan fell for a third day. Futures on the FTSE China A50 index slipped 3.2% in Singapore. Mainland financial markets are closed for public holidays until Wednesday, when Hong Kong will be closed. Futures contracts on the S&P 500 index fell 1.2%.

Evergrande is expected to pay interest on bank loans on Monday, with a one-day grace period. Although details of how much owed are not publicly available, Chinese authorities have already told major lenders not to expect a refund, people familiar with the matter said last week. Evergrande and the banks are discussing the possibility of extensions and renewals of some loans, the people said.

Payments due Thursday include $ 83.5 million in interest on an 8.25% five-year dollar bond, according to data compiled by Bloomberg. Evergrande is due to pay a 232 million yuan (US $ 36 million) coupon on an onshore bond the same day. The developer’s stock fell 19% Monday to the lowest level since 2011. Its dollar bond due 2022 was listed down 3.1 cents to the dollar to 26 cents, a record high.

Bloomberg.com

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