Evergrande contagion risk rises as stock, bonds sink to new lows

HONG KONG • Fresh signs of a cash crunch at China Evergrande Group sent shares and bonds of the world's most indebted developer to new lows on Tuesday, stoking fears of broader market contagion.

The property giant's stock tumbled to the lowest level since April 2017, extending its two-day loss to 25 per cent. Several of Evergrande's local and offshore bonds sank to records, while bonds of other junk-rated Chinese borrowers declined.

The nation's bank stocks also slumped.

Long-simmering doubts about Evergrande's financial health intensified this week after the company had a 132 million yuan (S$27.9 million) bank deposit frozen by a local court and was hit with a property sales ban by a city government.

The city later removed the ban, providing some relief to Evergrande's stock, but investors remain worried that the developer is not selling properties and other assets fast enough to repay its US$301 billion (S$412 billion) mountain of liabilities.

A partner at Beijing-based bond fund BG Capital Management noted: "The size of the frozen assets is small, but investors are concerned that more creditors will take similar actions."

Several large state-owned banks have already reduced their lending to Evergrande, though the developer has repeatedly said its relationships with creditors are normal.

The risk is that a major payment failure at Evergrande ripples through China's financial system. Officials from China's top financial regulator told Evergrande founder Hui Ka Yan at the end of last month that he should solve his company's debt problems as quickly as possible.

The frozen bank deposit has some creditors questioning whether Evergrande still enjoys the implicit support of the Chinese authorities, said Ms Omotunde Lawal, head of emerging-market corporate debt at Barings UK. "The key thing to watch now is if other banks or trust companies rush to demand loan repayment or freeze assets."

Bloomberg reported on Monday that Evergrande is considering an initial public offering in Hong Kong for its bottled water business, though the sale would raise only a few hundred million dollars and take place next year.

The Shenzhen-based developer is said to have about US$80 billion worth of equity in non-property businesses that could generate liquidity if sold.

Whether Evergrande can secure attractive prices for those assets remains to be seen. All of its key listed units have tumbled in recent weeks, with the market value of Evergrande Property Services shrinking by as much as US$17 billion since its February high. Evergrande New Energy Vehicle lost as much as US$60 billion in the period.

This rout began on Monday, after traders circulated a court ruling on a loan dispute between Evergrande and China Guangfa Bank. The court froze the 132 million yuan deposit held by Evergrande's main onshore unit at Guangfa Bank's request.

Late Monday, news emerged that Shaoyang city had halted sales at two of Evergrande's residential projects.

Shaoyang's government said it took the action after Evergrande did not deposit enough pre-sale funds into escrow accounts and intentionally evaded supervision.

On Tuesday, the Shaoyang authorities said they had allowed Evergrande to resume sales after the developer transferred more money into the accounts.

Chinese developers sell homes before construction is completed, but must deposit funds from sales in supervised bank accounts to prevent cash-strapped builders from abandoning projects.

The incidents suggest negative sentiment towards Evergrande has spread "beyond short sellers to local officials and banks", said Mr Brock Silvers from Kaiyuan Capital in Hong Kong.

Evergrande has a history of "pulling a rabbit out of a hat in terms of financing", said Mr Nigel Stevenson, an analyst at GMT Research.

"The problem is if that confidence ebbs away, people start looking out for their own interest and grabbing whatever they can. That's the danger of things unravelling quite quickly."


A version of this article appeared in the print edition of The Straits Times on July 22, 2021, with the headline 'Evergrande contagion risk rises as stock, bonds sink to new lows'. Subscribe