China: Investors seeking clues on Evergrande

Onshore markets resume today with eye on regulators.
Nathan Chow22 Sep 2021
    Photo credit: Unsplash Photo

    Onshore markets resume trading today (but Hong Kong SAR goes on holiday). Investors will look for signs of intervention by government to prevent a disorderly default by property company Evergrande. Market turmoil surrounding the developer intensified in the past trading sessions as investors interpreted government’s silence hitherto on the distressed firm as a lack of official support. Its shares in Hong Kong slumped 10.6% on Monday and Tuesday combined, taking year-to-date losses to 85%. A state-backed Chinese newspaper warned that the debt-ridden property giant should not bet on a government bailout on the assumption that it is "too big to fail", adding to the perception that the authorities are taking a tough stance on reining in financial risks. Special focus will be put on interest payments of two Evergrande bonds that come due on Thursday.


    Credit event at the nation’s second largest builder could have broader impacts. Volatility in both the domestic and offshore bond markets will exacerbate some developers’ refinancing difficulties. Two other large developers are already under the spotlight following recent credit-rating downgrades. Financial institutions with significant exposure to the Chinese property sector will also come under scrutiny. On a brighter note, a sensitivity test conducted on 4,015 banks by PBOC earlier this month suggested that banks could cope with a rise in their ratio of non-performing loans in the property-development sector of 15%ppt and a jump of 10%ppt in mortgages (the average capital adequacy ratio would only edge down from 14.4% to 12.3% -- still above the regulatory minimum of 10.5% to 11.5%).


    Concerns over Evergrande comes amid more signs of slowing recovery momentum. Retail sales disappointed with 2.5% growth last month as Delta outbreak weighed on consumption. A shortage of computer chips and electricity also put a damper on production. We expect the PBOC to be more proactive in managing liquidity conditions to avert systemic risk and put a floor beneath economic growth.


    Nathan Chow 周洪禮

    Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港

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