On the first trading day of Hong Kong stocks after the Mid-Autumn Festival holiday, Evergrande’s share price rose by 17.62% to 2.67 yuan at the close. Some media began to speculate whether the crisis would be resolved?
Evergrande has recently launched a series of self-rescue actions. On the one hand, it reiterated that “everything is done to guarantee the delivery”; on the other hand, a corporate bond issued by Evergrande was originally paid on September 23. Evergrande stated that it has been settled through off-market negotiation. Temporarily ease the market’s concerns about default on interest payments.
However, compared with the high of 20.2 yuan in Evergrande’s stock price in the past year, even after a day of skyrocketing, the market value still evaporates 86%. The Chinese government has also not stated that it will intervene. The alarm of the Evergrande crisis has not been lifted.
The focus of market attention continues to be how much knock-on effects the Evergrande crisis will have, and whether it will become China’s “Lehman moment”.
Evergrande’s self-help and rescue
For Evergrande, the Mid-Autumn Festival just past shows no signs of rest:
On Tuesday, Xu Jiayin, Chairman of the Board of Directors of Evergrande, issued a letter to all employees, stating that Evergrande will surely get out of the “dark moment” as soon as possible;
At midnight on Wednesday, Evergrande held a special meeting on “Resume work and resume production to ensure delivery”. Xu Jiayin asked the entire group to “put all energy into resuming work and production to ensure delivery”, and go all out to resume work and production, and do everything possible to ensure delivery. . Xu Jiayin said, “If you want to think about what the owners think and what the owners are anxious about, only by resuming work and production, resuming sales, and resuming operations can you protect the rights and interests of the owners, ensure the smooth payment of wealth investors, and gradually solve the business of upstream and downstream partners. Only when the votes are redeemed can the loans of financial institutions continue to be returned one after another”;
On Thursday, an Evergrande corporate bond named “20 Evergrande 04”, with a total size of 4 billion yuan, has a coupon rate of 5.8% during the interest calculation period, and an equivalent interest of about 232 million yuan. It will be held on September 23. Interest is paid on Sunday (Thursday). Evergrande announced that it will pay interest from September 23, 2020 to September 22, 2021 on the 23rd. But instead of going through the China Securities Depository and Clearing Corporation, they chose to negotiate over-the-counter methods. This has temporarily eased the previous worries about the possible interest payment default on the debt.
In addition to taking a series of self-rescue actions, the People’s Bank of China has also taken actions in response to market fluctuations caused by the Evergrande crisis.
On September 23, the People’s Bank of China increased the volume of reverse repo operations to 120 billion yuan. Following the daily volume of reverse repo operations in the previous week to 100 billion yuan, the central bank has further increased the volume. The open market today released a net 90 billion yuan.
Although the increase is not large, the meaning of care at the end of the season is very clear. Reuters believes that, in addition to continuing to stabilize cross-season capital fluctuations, the shock wave caused by the debt crisis of Evergrande has the potential to spread, and the policy may also be appropriate to release signals to reassure the consideration.
Zhou Hao, senior Asian economist at Commerzbank, believes that the central bank’s attitude is still slightly wider than expected, and overall market sentiment is not stable.
“In any case, the emotional instability is caused by Evergrande. The central bank is not directly targeting Evergrande, but against the series of market fluctuations that Evergrande has detonated.”
“Lehman Moment” worries
Although a number of good news has caused the stock price to rise, Evergrande is still far from getting out of the predicament.
Some analysts worry that Evergrande’s debt will be passed to the financial system through banks, triggering a crisis similar to the “Lehman Moment” in 2008.
There is data support behind this concern. Among Evergrande’s total liabilities of 1.97 trillion yuan, the total interest-bearing liabilities (bonds, bank loans, etc.) are 571.8 billion yuan. According to Evergrande’s letter to government departments at the end of last year, Evergrande’s liabilities involve more than 128 banks and more than 121 non-bank institutions.
However, on Thursday, China Everbright Bank, Hua Xia Bank, Bank of China, China Construction Bank, Bank of Xiamen, Bank of Nanjing, etc. all stated that their exposure to Evergrande Group is small and the risk is controllable.
Minsheng Bank is one of the banks with the largest exposure to Evergrande. On Thursday, the bank said that it will continue to reduce Evergrande’s risk exposure, and the loan balance will be reduced by about 15% compared with the end of June 2020. The cooperation between the two parties mainly focuses on on-balance sheet loans. Shadow banking models such as agency sales and funds have cooperated with Evergrande Group. All businesses are carried out in accordance with loan management requirements and have not participated in any hidden liabilities and off-balance sheet financing of Evergrande Group.
So will Evergrande’s default become China’s Lehman moment?
“In our opinion, it’s not even close.” Barclays Capital stated that the real “Lehman Moment” is a crisis of very different scale. If this happens, most of the lending institutions in the entire financial system will be impacted, the credit crunch in the real estate industry will be severely intensified, and lending activities in the inter-bank market will also stagnate.
However, in the real estate industry, the turbulence has been severe.
JPMorgan Chase believes that the three red lines imposed by the government on developers and restrictions on banks’ real estate loans have made the rapidly deteriorating situation even worse. The liquidity of the entire industry is tight, not just Evergrande. Recently, some weaker developers with refinancing needs have shown signs of distress, and their bonds are now trading at only 50-60% of the face value. “In fact, we estimate that there may be 11 defaults this year, with a total amount of US$30 billion (making the industry’s default rate of 23%).
Although it may not be as serious as the “Lehman Moment”, the negative outlook has caused rating agencies’ expectations for China’s economy to begin to decline.
The rating agency Fitch has just lowered China’s 2021 economic growth forecast from 8.4% to 8.1%, and pointed out that the main reason is that the slowdown in real estate will suppress domestic demand.
“Deleveraging in the real estate sector is curbing China’s economic recovery. Macro policies have begun to be recalibrated, but the slowdown in real estate activity will impact domestic demand and the global commodity market,” Fitch said in its latest report.
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