China tells Evergrande to avoid dollar bond defaults, Bloomberg reports

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(C) Reuters. An Evergrande sign is seen at the sales office for an under-construction luxury residential compound developed by China Evergrande Group in Beijing, China September 22, 2021. REUTERS/Carlos Garcia Rawlins

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By Clare Jim, Anshuman Daga and Tom Westbrook

HONG KONG/SINGAPORE (Reuters) – Chinese regulators have asked China Evergrande Group to avoid a near-term default on its dollar bonds, Bloomberg Law reported on Thursday, the day the property developer is due to make a much-awaited interest payment on its offshore debt.

In a recent meeting with Evergrande executives, regulators said the company should communicate proactively with bondholders to avoid a default but didn’t give more specific guidance, Bloomberg reported, citing a person familiar with the matter.

The Wall Street Journal reported separately on Thursday that Chinese authorities were asking local governments to prepare for the potential downfall of Evergrande, China’s second-biggest property developer, citing officials familiar with the talks.

A spokesperson for Evergrande, China’s second-biggest property developer, declined to comment on the two reports.

Evergrande is due to pay $83.5 million in interest on a $2 billion offshore bond on Thursday and also has a $47.5 million dollar-bond interest payment next week.

Both would default if the company, which has outstanding debt of $305 billion, fails to settle the interest within 30 days of the scheduled payment dates.

A company spokesperson did not immediately respond to request for comment on the payment obligation due on Thursday.

Evergrande, which epitomises the borrow-to-build business model and was once China’s top-selling developer, has run into trouble over the past few months as Beijing tightened rules in the property sector to rein in debt levels and speculation.

Global markets are now on tenterhooks ahead of Evergrande’s payment obligations as there are fears its difficulties could pose systemic risks to China’s financial system.

Investors worry that the rot could spread to creditors including banks in China and abroad, though analysts have been downplaying the risk that a collapse would result in a “Lehman moment”, or a systemic liquidity crunch.

Central bankers say they are keeping a close eye on Evergrande. The Bank of England said on Thursday that it did not expect the situation to go badly wrong and was cautiously optimistic Beijing would avoid any major issues.

Switzerland’s central bank, meanwhile, said Evergrande should not be dismissed as a small, local problem.

SHARES BOUNCE BACK

Shares in Evergrande rose nearly 18% on Thursday after it said it had resolved the coupon payment for one of its domestic, onshore bonds, though the stock is down more than 80% this year.

Shares in Evergrande Property Services rose nearly 8% and relief spread to mainland property stocks listed in Hong Kong. Country Garden, China’s largest developer, climbed 7%, Sunac China jumped 9% and Guangzhou R&F Properties ended 7.5% higher.

Evergrande Chairman Hui Ka Yan urged his executives late on Wednesday to ensure the delivery of quality properties and the redemption of its wealth management products, which are typically held by millions of retail investors in China.

He did not mention the company’s offshore debt, however.

U.S. equity index futures, which had kicked as much as 0.8% higher on Thursday after the Bloomberg report about avoiding debt defaults, trimmed earlier gains to trade up 0.6% following the Wall Street Journal article.

The WSJ said local governments had been ordered to assemble groups of accountants and legal experts to examine the finances around Evergrande’s operations in their respective regions.

They have also been ordered to talk to local state-owned and private property developers to prepare to take over projects and set up law-enforcement teams to monitor public anger and “mass incidents”, a euphemism for protests, it said.

Analysts said the moves by Beijing underscored the pressure on Evergrande, whose liabilities run to 2% of China’s gross domestic product, to contain the fallout from its credit crunch and protect mom-and-pop investors over professional creditors.

“Assuming this situation goes the way of a debt restructuring … we think the retail investor nature of the wealth management products would be prioritised for social stability,” said Ezien Hoo, credit analyst at OCBC Bank.

Foreign investors, who hold paper issued by Evergrande’s offshore entities, might find it harder to get paid as they had “lower bargaining power versus other lenders closer to the assets”, he said.

Oscar Choi, founder and chief investment officer at Oscar and Partners Capital Ltd, said Evergrande was wary of enflaming social tensions by leaving homes unbuilt, construction workers unpaid and retail investors counting their losses.

Once those priorities had been met, Evergrande would talk to its other creditors, he said, adding: “Otherwise a few hundred thousand people will fight with the government.”

‘ALL MY SAVINGS’

U.S. Federal Reserve Chair Jerome Powell said on Wednesday that Evergrande’s problems seemed particular to China and that he did not see a parallel with the U.S. corporate sector.

Fitch Ratings said on Sept. 16 that it had cut its 2021 economic growth forecast for China to 8.1% from 8.4%, citing the impact of the slowdown in the country’s property sector on domestic demand.

Underscoring the scramble to avoid contagion, Chinese Estates Holdings, Evergrande’s second-biggest shareholder, said on Thursday it had sold $32 million of its stake and planned to sell the rest.

Some analysts say it could take weeks for investors to have any clarity about how the Evergrande situation will resolve.

“The company could restructure its debts but continue in operation, or it could liquidate,” wrote Paul Christopher, head of global market strategy at Wells Fargo (NYSE:WFC) Investment Institute. In either case, investors in the company’s financial instruments would likely suffer some losses, he wrote.

“In the event of a liquidation, however, Chinese and global investors could decide that the contagion could spread beyond China,” he said.

At an eerily quiet construction site in eastern China, worker Li Hongjun says Evergrande’s crisis means he will soon run out of food while Christina Xie, who works in the southern city of Shenzhen, fears Evergrande has swallowed her savings.

“It’s all my savings. I was planning to use it for me and my partner’s old age,” said Xie. “Evergrande is one of China’s biggest real estate companies … my consultant told me the product was guaranteed.”

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