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China Evergrande fears consume investors awaiting trading By Reuters


© Reuters. FILEPHOTO: A sign in Hong Kong, China, indicating the China Evergrande Centre building is seen. August 25, 2021. REUTERS/Tyrone Siu/File Photo


NEW YORK/BOSTON/HONG KONG (Reuters) – Anxiety over the prospect of China Evergrande Group defaulting on its mountain of debt gripped investors on Tuesday ahead of two repayment deadlines, with much still unknown about the potential risks to banks in China and global markets.

Evergrande is due to pay $83.5 millions in interest for its March 2022 bond. This will be a significant test. The March 2024 note payment is due to Evergrande for $47.5million on September 29.

If Evergrande does not settle interest in the due time, both bonds will default.

Investors worried about what a default might have on the economy and dumping Chinese property stocks were causing global markets to be rattled Monday. They also sought refuge in safe-haven investments as they became concerned about how it could impact the rest of the world.

Evergrande shares fell another 10% Monday, after Chinese regulators said that China’s $305 billion debts could cause widespread financial losses.

“I think (Evergrande’s) equity will be wiped out, the debt looks like it is in trouble and the Chinese government is going to break up this company,” Andrew Left, founder of U.S.-based Citron Research and one of the world’s best known short-sellers, told Reuters.

Left added that “But, I don’t believe this will be the straw to break the global economic’s back.”

Left published a June 2012 report that Evergrande was bankrupt and defrauded investors.

Citi analysts in a research note dated Tuesday said regulators may “buy time to digest” Evergrande’s non-performing loan problem by guiding banks not to withdraw credit and extend the interest payment deadline.

Those analysts said there was “mounting investor concern about potential risk spillover” from Evergrande’s debt crunch, considering the potential liquidity drain for private developers due to increased difficulty in obtaining bank credit, and the contagion effect in the banking sector as they expect around 40.7% of China banks’ assets are related to the property sector.

Citi stated that Evergrande’s default crisis was an important systemic threat to China’s financial systems, but it wasn’t China’s Lehman moment.

Evergrande’s shares, which have been trying to raise money to pay many of its lenders, suppliers, and investors, fell to 10.2% on Monday. This was after having fallen 19% from its lowest point since May 2010, when it reached HK$2.28.

China’s financial system could be exposed to greater risk if it fails to stabilize its $305 billion debts, regulators warn.

Investors worried about spillover effects to the global economic system caused world shares to plummet and the dollar to strengthen. U.S. stocks were sharply lower, with the down nearly 2%. ()

In any default scenario, Evergrande, teetering between a messy meltdown, a managed collapse or the less likely prospect of a bailout by Beijing, will need to restructure the bonds, but analysts expect a low recovery ratio for investors.

Tallbacken Capital Advisors, New York’s Michael Purves stated in a note that China’s foreign currencies were in “arguably better condition” than in previous years. This was in response to Beijing choosing to “throw money away at Evergrande”.