‘Eerie silence’ as Evergrande misses payment deadline

The embattled Chinese property developer Evergrande is inching closer to the potential default that investors fear, after missing an interest payment deadline.

The company, which has total debts of about $305bn (£222bn), has run short of cash and investors are worried a collapse could pose systemic risks to China’s financial system and reverberate around the world.

A Thursday deadline for paying $83.5m (£61m) in bond interest passed without remark from Evergrande, and bondholders had not been paid nor heard from the company, two people familiar with the situation told Reuters.

The firm is in uncharted waters and enters a 30-day grace period. It will default if that passes without payment.

“These are periods of eerie silence as no one wants to take massive risks at this stage,” said Howe Chung Wan, the head of Asia fixed income at Principal Global Investors in Singapore.

“There’s no precedent to this at the size of Evergrande … we have to see in the next 10 days or so, before China goes into holiday, how this is going to play out.”

China’s central bank again injected cash into the banking system on Friday, seen as a signal of support for markets. But authorities have been silent on Evergrande’s predicament and China’s state media have offered no clues on a rescue package. Shares in Evergrande were down 13% on Friday.

The saga of Evergrande has been closely watched by local as well as international media outlets, with some going as far as calling it “China’s Lehman Brothers moment”.

In the past few weeks, protesters have gathered outside the company’s headquarters in Shenzhen, southern China, to demand payment.

According to reports, regulators in recent days have told the company to “communicate proactively” with bondholders and avoid a default. In the meantime, according to a Bloomberg report on Thursday, policymakers are trying to learn more about who holds Evergrande’s bonds.

On Wednesday, Evergrande claimed it had struck an agreement with Chinese bond holders under which it would pay its domestic bonds’ interest payments, which are estimated to be $35.9m (£26.3m). Shares in Evergrande bounced back in Hong Kong on Thursday.

However, the rating agency Fitch downgraded its forecast for China’s economic growth because of concerns about a slowdown in the country’s colossal housing market and fears about the unfolding saga of Evergrande.

At the heart of the concern for Beijing is the risk of a possible spillover effect to the broader Chinese economy and its consequences for social stability. In the past few days, local governments have been asked to contain the ripple effect of Evergrande’s demise. According to reports, officials were tasked with preventing unrest and mitigating the impact on homebuyers and potential job losses.

China’s top financial regulator, the Financial Stability and Development Committee, told provincial authorities earlier this month to closely monitor social and economic instability as a result of Evergrande’s potential collapse, according to a Wall Street Journal report.

But it is unclear whether officials think the company should eventually impose losses on offshore creditors. If it does, it will dampen foreign investors’ mood when making investment decisions in China in the future, analysts say.

“A lot of Chinese people have a lot to lose if their property prices plummet as a result of a disorderly collapse of Evergrande. It will hurt people’s confidence,” said Dexter Roberts of the Washington DC-based Atlantic Council’s Asia Security Initiative. “But on the opposite side, if the government is seen to have helped Evergrande too much, it will cause moral hazard.”

The trouble engulfing Evergrande is only the tip of the iceberg in China’s once unrestrained property market. UBS estimates there are 10 developers with potentially risky positions with combined contract sales of 1.86tn yuan (£209.7bn)– or 2.7 times Evergrande’s size.

In recent weeks, Xu Jiayin, who founded Evergrande in 1996 in the southern city of Guangzhou, has urged his 123,276 employees to unite and “work hard in the face of adversity”. In a memo sent early this week, Xu said the company would soon “walk out of the darkness”.

But the loss of confidence in Evergrande and Xu, once Asia’s richest man, has also led to the conglomerate’s staff joining members as well as homebuyers protesting in front of the company’s headquarters in Southern China.

“Evergrande, give back my money I earned with blood and sweat!” one protester shouted.

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