China’s Evergrande to Make Domestic Bond Payment, Easing Fears

China Evergrande Group’s main unit has said it will make a coupon payment on its domestic bonds on schedule, offering some relief to jittery markets that had been on edge over fears that a default by China’s No 2 developer could ripple through the global financial system.

Hengda Real Estate Group said in a statement on Wednesday it would make the coupon payment on its Shenzhen-traded 5.8% September 2025 bond on time on September 23 (tomorrow).

The announcement comes as Evergrande, once the country’s top-selling developer, inches closer to a key deadline for an interest payment on a dollar bond, with markets tense even as investors and analysts played down the threat of its troubles becoming the country’s “Lehman moment.” The large US investment bank went bankrupt in 2008 amid the subprime mortgage crisis.

Hengda Real Estate’s coupon payment totals 232 million yuan ($35.88m), according to Refinitiv data.

“We are still trying to understand what this payment means for the other bonds but I imagine they would want to stabilise the market and make other coupon payments, given the close scrutiny,” said a source familiar with the situation, who declined to be identified as they are not authorised to speak to the media.

US stock futures, the yuan and the risk-sensitive Australian dollar rose, while safe-haven assets such as the yen and US Treasuries slipped.

Evergrande is set to make its onshore bond payment on time but the developer has not indicated whether it will be able to pay $83.5m in interest due on its March 2022 bond on Thursday. It has another $47.5m payment due on September 29 for March 2024 notes.

Both bonds would default if Evergrande fails to settle the interest within 30 days of the scheduled payment dates.

Trade in Evergrande’s onshore exchange-traded bonds has been halted since September 16, when Hengda Real Estate applied to suspend trading for a day. While trading technically resumed a day later, it now only takes place through negotiated transactions in what traders said was an attempt to curb volatility.

IMF KEEPING A CLOSE WATCH

The International Monetary Fund said on Tuesday it is closely following developments surrounding the Evergrande Group, but believes Beijing has the tools to prevent the situation from turning into a systemic crisis.

IMF chief economist Gita Gopinath said the real estate sector was a big part of China’s economy, and Evergrande’s potential default could have implications for China’s economic activity and financial stability.

“We are following the developments in China very closely,” Gopinath said, underscoring the need for regulatory reforms to address the heavily leveraged property sector. “We still believe that China has the tools and the policy space to prevent this turning into a systemic crisis.”

While concerns about the spillover from a messy collapse roiled markets on Monday, US stocks were flat on Tuesday and Chinese shares fell in early trade after a two-day public holiday. But China’s property index recovered losses and was up more than 3%, while banking stocks were down about 3%.

Evergrande is so deeply intertwined with China’s broader economy – from retail investors to infrastructure-related firms that are a gauge for global commodities demand – that fears over contagion have kept financial markets on tenterhooks.

“There’s been a fair bit of concern about the possibility of contagion,” analysts at New York-based Bespoke wrote in a research note on Tuesday. “But so far that concern isn’t showing up in parts of the credit markets that have served well as red flags for broader credit crunches in the past.”

PBOC HELPS SOOTHE NERVES

China’s central bank helped boost sentiment with a gross injection of short-term cash into the financial system after concern over a debt crisis at Evergrande roiled global markets.

The People’s Bank of China (PBOC) pumped 120 billion yuan ($18.6bn) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan ($13.9bn).

“The PBOC’s net injection is probably aimed at soothing nerves as the market worries about Evergrande,” said Eugene Leow, a senior rates strategist at DBS Bank Ltd in Singapore. “While the aim may be to instill discipline, there is also a need to prevent contagion into the real economy or to other sectors.”

The need to calm market jitters is pressing amid losses in China-related equities worldwide over recent days amid concern over Evergrande’s debt woes.

Evergrande missed interest payments due on Monday to at least two of its largest bank creditors, Bloomberg news agency reported on Tuesday, citing people familiar with the matter. The missed payments had been expected as China’s housing ministry had said that the company would be unable to pay on time, it said.

As investors and policymakers around the world tried to assess the potential fallout, Securities and Exchange Commission (SEC) chair Gary Gensler said the US market is in a better position to absorb a potential global shock from a big company default than it was before the 2007-2009 financial crisis.

FUNDS BUYING DEBT

Federal Reserve chair Jerome Powell will likely be asked about the fallout from Evergrande when he speaks after the Federal Reserve’s two-day meeting that wraps up on Wednesday at 2 pm ET (1800 GMT).

Despite the looming default, some funds have been increasing their positions in recent months. Fund giant BlackRock and investment banks HSBC and UBS have been among the largest buyers of Evergrande’s debt, Morningstar data and a blog post showed.

Other bondholders include UBS Asset Management and Amundi, Europe’s largest asset manager.

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.

S&P Global Ratings said on Monday it believed the Chinese government would only act in the event of a far-reaching contagion posing systemic risks to the economy.

‘CONTROLLED DEMOLITION’

“I would characterise Evergrande as a telegraphed and controlled detonation,” said Samy Muaddi, the portfolio manager of the $5.1bn T Rowe Price Emerging Markets Bond fund, who does not have a position in the company.

BNP Paribas estimated in a research note that less than $50bn of Evergrande’s $300bn outstanding debt is financed by bank loans, suggesting the Chinese banking sector will have a sufficient buffer to absorb potential bad debts.

Citigroup Inc subsidiaries serve as trustee and payment agent for a China Evergrande bond that matures in March 2022 and has $83.5m in interest coming due on Thursday.

“We do not have any direct lending exposure to Evergrande; our indirect exposure through counterparty credit risk is small and with no single significant concentration,” Citigroup spokeswoman Danielle Romero-Apsilos said in an email on Tuesday. She declined to comment on Evergrande’s scheduled payments.

Evergrande’s Hong Kong-listed shares fell as much as 7% on Tuesday, having tumbled 10 percent the previous day, on fears its $305bn in debt could trigger widespread losses in China’s financial system in the event of a collapse. The Hong Kong stock market was closed on Wednesday for a holiday.

• Reuters with additional editing by Jim Pollard