Evergrande received a “broad set of instructions” from Chinese regulators in a recent meeting, during which the beleaguered developer was told to direct energy toward finishing properties and paying retail investors.
As for its bonds, Evergrande should “avoid a near-term default” and “communicate proactively” with holders.
Additional instructions weren’t given, apparently. According to people familiar with the matter who spoke to Bloomberg, “there’s no indication that regulators offered financial support to Evergrande,” or at least not for looming payments. “Policymakers are trying to learn more about who holds Evergrande’s bonds,” the same article said.
The company had an $83.5 million coupon due Thursday, but there’s a 30-day grace period before a missed payment would constitute a default. Its 8.75% USD bond rose 4.9 cents when the Bloomberg story crossed. A dollar bond due April 2022 was set for the largest rise ever, up 7.1 cents to 31.6. Other notes were poised for similarly large moves.
On Wednesday, an ambiguous filing said an interest payment on a yuan bond coming due was “resolved via negotiations off the clearing house,” suggesting Evergrande was forced to alter the timeline, terms or both on its coupon payments.
Minutes after the Bloomberg story hit, Dow Jones said China is making preparations for the company’s “potential downfall.”
Citing officials familiar with the discussions, the Wall Street Journal said Beijing is “signaling a reluctance” to bail the company out, with officials describing the preparations as “getting ready for the possible storm.”
Local government agencies and SOEs would intervene “only at the last minute” if Evergrande proves unable to manage the situation in an “orderly” fashion, the Journal‘s sources said.
Earlier, Chinese shares rose sharply amid rumors Beijing was working on a restructuring plan. Evergrande jumped 18%, which sounds impressive until you put it on a chart (figure below).
At one point, the shares were more than 30% higher.
The Hang Seng Property Index recovered more ground after plunging earlier this week, casino shares rose and some of China’s largest tech names surged. One PM attributed gains in property shares to short-covering, while others said mainland investors may have been looking for ostensible bargains (try not to laugh) as the stock connect resumed.
More broadly, though, the relief rally seemed to be predicated on the notion that Beijing will ring-fence Evergrande’s implosion. Or at least confine it to the property sector, averting spillover, especially to the financial system.
The PBoC injected more than 100 billion yuan in short-term liquidity Thursday. The 110 billion yuan was the most since January (figure below).
Again, some of that is seasonal, but the PBoC is quite clearly attempting to avert any kind of tumult in the interbank market, where rates fell Thursday.
The Journal‘s reporting went on to detail instructions given to local governments, which will form teams of “accountants and legal experts” to assess the situation while standing ready to “take over” unfinished property projects.
As for social unrest, officials told the Journal that local police units will continually take the temperature of public sentiment and monitor any “mass incidents.”
Holders of Evergrande’s dollar bond with a coupon due Thursday hadn’t received payment as of 5PM in Hong Kong.
“Averting spillover”, except for foreign investors.
Maybe think about Evergrande’s balance adjusted to eliminate items that CCP doesn’t consider high priority.
For example
Debt to foreigners (Dear Blackrock, consider this your contribution to common prosperity, signed: Xi)
Debt to local governments and domestic financial institutions (Dear local entity, evaluate your lending more carefully next time, signed: Xi)
Commercial paper other than to small suppliers (Dear supplier, see local entity, signed: Xi)
Shareholder equity (Dear shareholders, see Blackrock, signed: Xi).
This might leave a B/S looking like
Assets:
Cash & equiv
Receivables
Land
Work in Progress
Completed Inventory
Liabilities:
Buyer deposits
Commercial paper to small suppliers
Other CP = 0
Wealth management products
Bank loans = 0
Bonds = 0
Shareholders Equity:
Existing shareholders = 0 LOL
New shareholders CCP-designated
Protect the buyers, small suppliers and wealth management investors aka Evergrande employees, and who’s left to protest? Everyone else will take it on the chin, and like it.
That sounds a lot like privatizing the losses. How capitalistic of the Chinese Communist Party.
Interesting point in an article in today’s FT. Evergrande’s founder, who was the 5th richest man in China, still owns 70% of the stock. As they point out, it’s unlikely that Xi will go out of his way to bail him out.
He’s lucky to not (yet) be “detained for tea”.