Commentary on Political Economy

Thursday, 24 September 2020



Evergrande bond trading halted on reports of cash crunch

Rating agency S&P on Friday downgraded Evergrande’s credit outlook to negative © Reuters

Trading in China Evergrande’s bonds was halted in Shanghai after reports that the property group was seeking government support to stave off a cash crunch prompted wild swings in its shares and debt.

The Shanghai stock exchange said in a statement on Friday morning that trading in one of the heavily indebted developer’s bonds had been suspended for half an hour due to “abnormal fluctuations” after its price collapsed.

The volatility came after a letter, purportedly from the company, circulated on Chinese social media on Thursday requesting support for a previously planned reorganisation from the provincial government in Guangdong, where Evergrande is based.

Evergrande, which has over $120bn of debt, said in a filing to Hong Kong’s stock exchange late on Thursday that the documents were “fabricated and pure defamation” and that it had reported the matter to China’s security authorities.

The shares fell 6 per cent on Thursday and dropped shortly after trading began on Friday, before recovering to rise 3 per cent.

Evergrande’s offshore debt, which trades at a discount, also dropped. A bond maturing in June fell by 6 per cent to 91 cents on the dollar. Longer-dated bonds also dropped, with those maturing in 2025 falling to 77 cents, driving yields up to 15.7 per cent.

In the purported letter dated August 24, Evergrande asked the Guangdong government to approve a plan to float its subsidiary Hengda Real Estate on Shenzhen’s stock exchange through a merger with an already listed company.

Evergrande reportedly added that a failure to complete the reorganisation would pose “systemic risks”, without specifying what those were.

Evergrande is a significant source of systemic risk

Nigel Stevenson, GMT

The company has raised about Rmb130bn ($19bn) by selling shares in Hengda and needs to repay investors if it is not listed by the end of January. As of June, Evergrande had Rmb142.5bn in cash and cash equivalents.

Rating agency S&P on Friday downgraded Evergrande’s credit outlook to negative. “Evergrande's short-term debt has continued to surge, partly due to its active acquisition of property projects,” it said. “We had previously expected the company to address its short-term debt, especially given the tough economic climate.”

However, S&P added that the risk of a liquidity crunch was “still low for now”.

Analysts have long been concerned that any issues at Evergrande could ripple through China’s financial system.

“Evergrande is a significant source of systemic risk,” said Nigel Stevenson, an analyst at GMT Research. “There are huge debts in the listed parent company that will ultimately need to be refinanced.”

Investors have sharpened their focus on China’s heavily indebted property developers following the coronavirus pandemic, which have huge volumes of outstanding debt held by foreign entities. 

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