Concerns over the potential collapse of Evergrande, the giant Chinese residential property market developer, that led to a global stock market sell-off earlier this week have eased. Stock markets in first North America and then Asia rallied last night and this morning on an announcement by Evergrande that the company will today meet a crucial bond interest repayment due.
Worries have centred on the potential of ripple effect that could spread into other markets should Evergrande, floundering under the weight of a $300 billion mountain of debt, go to the wall. It looks very unlikely the Chinese state will step in to bail Evergrande out, despite the blow to consumer confidence that would inevitably result. An estimated 1.4 million Chinese households who have paid all or part of the cost of apartments bought off-plan are waiting for uncompleted properties from the developer.
Yesterday, however, the immediate threat of the company collapsing was assuaged by a statement from Evergrande that it would pay £26.3 million in interest due today on domestic bonds due to mature in 2025. The commitment was made after talks with bondholders.
The news injected some new optimism into global stock markets. The FTSE 100 recorded its best session in two months to record a 1.5% gain, recovering losses taken earlier in the week. The broad-based Euro Stoxx 600 added 1%. On Wall Street, whose major indices had suffered four consecutive days of losses, the S&P 500, Nasdaq and Dow Jones industrial average each gained 1% yesterday. Those gains could have been greater if enthusiasm hadn’t been dampened by the Federal Reserve indicating it could start to taper economic stimulus programmes in November and raise interest rates from early 2022.
The Shanghai Composite index, mainland China’s most-watched index, was expected to fall today after two days holiday for the Mid-Autumn festival which this year fell on September 21. However, it defied expectations to gain just under 0.4%.
Worries that an Evergrande collapse could trigger a systemic fissure in China’s economy has hit the share price of commodities companies like miners and traders this week. China is the world’s biggest buyer of raw materials. They bounced back yesterday alongside spot prices for metals. Copper gained 3%, driving the share price of FTSE 100 copper miner Antofagasta up by 7%.
Asia-focused banks were among the other major winners with the Standard Chartered and HSBC share prices up 4.7% and 4.3% respectively. HSBC has been among the banks buying up Evergrande’s discounted debt and is exposed to the property developer’s survival.
The company owes £61.1 million to overseas debt investors on top of the £26.3 million to be paid to domestic Chinese investors today but no statement has been made on whether that will also be serviced. Another £34.8 million in bond interest payments is also due next week.
The ratings agency S&P Global believes “a default is likely” but the big question is whether the company can secure enough liquidity in the short term to enable it to negotiate an orderly restructuring of its debt.
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