Insights

Moment of Truth For China’s Evergrande Group

Interest payments on two Evergrande notes come due Thursday for China Evergrande Group bondholders. It is time to see whether or not the property giant’s liquidity crisis is as dire as it appears. We will find out if they can continue meeting obligations to bondholders despite falling behind on payments. It seems pretty bleak as investors are priced in a high likelihood of default. With one of the notes trading less than 30% of face value, it would seem it is a possible Lehman scenario. What will the CCP do in the event of a collapse? Will they bail out Evergrande or let them fail? 

The major concern is about Evergrande’s ability to pay back $300 billion of liabilities that is currently flooding China’s financial markets. Real estate firms have seen a plunge in shares, at the same time when the yield index of dollar-denominated junk bonds climbed to the highest it has been in a decade. According to Bloomberg: The People’s Bank of China injected $14 billion of short-term cash into the financial system on Friday in a sign policy makers want to soothe nerves.

A possible selloff in Evergrande bonds tanking the broader credit market will likely be dependent on the company’s ability to buy more time with banks. A disastrous default on loans has the possibility of stoking fears of a widespread contagion in the market. This is obviously something Xi Jinping’s and the Chinese government have an intense need to avoid even as it tightens restrictions on financing on the already overburdened developers as it also discourages government bailouts.

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