S'pore stocks, currency rebound after concerns ease on possible Evergrande default

The benchmark Straits Times Index rose 0.93 per cent to close at 3,076.44 points.
The benchmark Straits Times Index rose 0.93 per cent to close at 3,076.44 points.PHOTO: ST FILE

SINGAPORE - Singapore's stocks rebounded on Thursday (Sept 23) as concerns eased over a possible default on debt repayments by China Evergrande Group.

Chinese regulators issued a broad set of instructions to the company to focus on completing unfinished properties and repaying individual investors while avoiding a near-term default on its US dollar bonds.

The benchmark Straits Times Index (STI) rose 0.93 per cent to close at 3,076.44 points. The STI had dropped 0.5 per cent on Wednesday and touched its lowest level since March earlier in the week amid fears that a messy default of Evergrande could ripple through the world's second-largest economy and the global financial system.

The instructions from regulators came a day after Evergrande's main unit said it has resolved an interest payment due on one of its domestic bond although it did not specify how much interest it would pay or when.

Uncertainty still surrounds whether Evergrande can pay an US$83.5 million (S$112.6 billion) bond payment due on Thursday (Sept 23). It has another US$47.5 million payment due on Sept 29 for bonds due in March 2024.

The Singapore dollar also recovered from the four-week low it had hit on Wednesday, rising to 1.3488 to a US dollar, versus 1.3526 on Wednesday.

The Singdollar's recent slide was mainly attributed to concerns ahead of a policy meeting of the United States Federal Reserve. However, slowing growth momentum in China and concerns of contagion from Evergrande's woes were also seen as undercurrents.

The Fed indicated on Wednesday that a rate hike would occur next year and also announced the beginning of the end to the monthly asset purchases, also referred to as quantitative easing.

The withdrawal of monetary easing by the US is likely to be followed by other major central banks. Higher interest rates in advanced economies are in contrast to a low-rate environment still needed by some Asian countries that are struggling to contain the Covid-19 pandemic.

The debt-related issues in China's real estate sector, which accounts for about 30 per cent of economic output, could further complicate the overall growth trajectory already facing headwinds from supply chain disruptions from Covid-related lockdowns.

China is a major trading partner and investor in many Asian countries so its economic health is crucial for most of the economies in the region, including Singapore.

DBS Bank senior economist Nathan Chow said investor anxiety may persist amid the Evergrande situation and the scaling back of monetary support measures by the Fed and other major central banks.

"The synchronised global recovery story that fuelled the global market rally and US dollar sell-off after the Covid-19 outbreak last year is becoming increasingly out of reach, especially for the rest of this year," noted Mr Chow.

Evergrande's debt troubles are linked to the regulatory clampdown by Chinese authorities that started late last year. Rules on how companies in some sectors, including real estate and construction, can handle their finances have left some firms struggling to manage their debts.

Evergrande had more than US$368 billion of liabilities - equivalent to about 2 per cent of China's gross domestic product - and just 87 billion yuan (S$18.2 billion) in cash at the end of June, according to its latest financial statements.

It has 1,300 projects across 280 cities in China and 214 million sq m of land reserves worth 457 billion yuan as well as stakes in businesses ranging from an electric-vehicle maker to a bottled water company.

The company needs to make US$669 million in coupon payments by the end of this year with about US$615 million of that on its US dollar bonds.

No company outside China has expressed concerns over its direct or indirect exposure to Evergrande or its debts. But fears of a default by the firm that triggers a broader sell-off and increasing pressure on other debt-riddled companies have roiled markets.

At least 97 Chinese companies are likely to face difficulties in repaying a total of US$83 billion in debt this month.

Citigroup analyst Robert Kang believes Singapore and Hong Kong banks have the largest exposure to a potential systemic sell-off prompted by an Evergrande default.

Mr Kang said while Singapore banks are not principal bankers of Evergrande, broader China concerns are likely to impact their share prices.

China's own banking system is the most at threat from a default spillover as 41 per cent of bank assets were directly or indirectly associated with the property sector as at Dec 31 last year.

Not all Chinese developers are struggling with debt payments but they all share the regulatory pressure from Beijing, which is seeking to reduce their borrowing and cool down property prices.

Mr Eli Lee, head of investment strategy at the Bank of Singapore, said while he remains constructive on the long-term outlook of China's economy, investors should be cautious of a mixed set of risk-reward over the medium term.

He said the overall regulatory environment on the Chinese property sector is expected to remain tight as the government remains focused on capping developers' leverage and preventing the housing market from overheating.

"It would be tough to bottom-fish amid an uncertain regulatory landscape," Mr Lee noted.

He added that Evergrande debt issues may continue to instil volatility in markets at home and abroad, although he believes that the contagion risk will eventually be relatively contained if the Chinese government intervenes before a potential default goes through.

"The Chinese government would also need to manage potential overly adverse spillovers to real estate prices and engineer a soft landing," he said.

But squeezing funding avenues for a sector which accounts for about 30 per cent of economic output will hinder the pace of economic expansion, which could hurt growth prospects of a myriad of companies and economies across Asia.

Maybank Kim Eng estimates that the knock-on effect of a 1 percentage point decline in China's GDP growth could cut Singapore's GDP expansion by 0.6 percentage point.

That is higher than other trade-dependent economies in South-east Asia such as Thailand and Malaysia, which stand to lose 0.5 percentage point.

DBS Bank estimates that the impact could be larger given China is not only one of the top non-oil domestic export (NODX) destinations for Singapore but also the number-one recipient of direct investments from the Republic.

A 1 percentage point fall in China, DBS warns, could trigger a similar decline here.