Sentiment improved (at the margins anyway) on Wednesday after Evergrande’s onshore property unit alluded to some manner of “resolution” around interest payments due Thursday on a yuan-denominated obligation.
The filing raised more questions than it answered. The looming payment for a 5.8% 2025 bond was “resolved via negotiations off the clearing house,” an exchange filing said.
It wasn’t immediately clear what that meant. Some suggested Evergrande may have worked out an agreement to defer payments. If a restructuring is a credit event and deferring payments constitutes restructuring, then Evergrande’s “resolution” is just semantics. There’s a lot of interest coming due (figure below).
But, for markets, “resolved” was better than “not resolved,” and risk assets got a fleeting bump from the news.
Paying (or not paying) bondholders directly (i.e., “off the clearing house”) suggested Evergrande was forced to alter the timeline, terms or both on its coupon payments.
So, Evergrande is buying time. Only not literally. Because it doesn’t have any money. Rather, the company may have pleaded with bondholders to accept new terms or, at the least, to refrain from searing “default” atop its logo with a red-hot branding iron.
For outsiders, the specifics around this particular arrangement may never be known. “The company isn’t required to disclose further [information] about ‘off-the-clearing house’ arrangements,” Bloomberg’s Shen Hong noted.
Read more: Evergrande Makes Lehman Trend Again
Last week, Chinese officials warned banks that Evergrande would miss loan payments this week. And it did. The company also needs to make a payment on a dollar note Thursday.
Mainland Chinese shares managed to close mixed after initially falling coming off a two-day holiday. The PBoC injected a net 90 billion in liquidity in an apparent bid to benzo money markets.
The gross amount pumped into the banking system Wednesday exceeded injections made late last week (figure below).
Normally, that would come with a caveat about not reading too much into it given quarter-end and holidays, but it’s obvious the PBoC is acting preemptively to forestall any mini-panic attacks that might be in the offing.
Of course, what the market really wants is some manner of plan for Evergrande from Beijing.
It could be that there isn’t such a plan. Only contingency plans (plural) in the event default causes contagion that threatens to spill over.
The loan prime rate was kept unchanged Wednesday for the 17th consecutive month (figure below).
“Policymakers have yet to reveal their ultimate response, but we expect market-calming liquidity measures in the banking sector to help curb Evergrande’s fallout and stem systemic risk,” TD’s Sacha Tihanyi and Mitul Kotecha wrote.
Still, they called it “unlikely that policymakers will loosen credit conditions to help boost the real estate sector.”
And therein lies the dilemma for Beijing. Containing systemic risk from Evergrande could entail doing precisely the opposite of what authorities are keen to do, namely curb excesses in the property sector.
If people think the Fed and the US Treasury can’t withstand higher interest rates, China’s sensitivity is much more acute. Their economy won’t survive higher interest rates as that would burst their real estate bubble. Threading the needle indeed.
It seems inevitable that the world moves towards the China-S, China Sea-African axis and the N. American Western Euro-Australian axis.
Growth, and peace, will be tricky with current and forecasted demographic shifts.
Simultaneous meltdowns in tech and real estate is likely not something Beijing is willing to entertain. I would venture a guess that this ‘resolution’ may be driven by Beijing itself. If the goal is to alleviate excess in the housing market, it’s conceivable they would negotiate with creditors quietly, without a public announcement, to avoid the perception they will come to the rescue if other firms collapse. That sort of action would be consistent with their ‘common prosperity’ narrative, as the general public would likely view a bailout as saving the rich from bankruptcy, rather than curbing systemic risks.
Good comment