What is China Evergrande crisis? Why are world markets jittery over Chinese group’s likely default?

Some investors staged a
protest in front of the company’s Shenzhen HQ demanding immediate
payouts  

World stock markets are
jittery over the likely impact of the Evergrande crisis brewing in China.
Evergrande Group, the Asian nation’s second largest real estate player is
expected to default on Evergrande bond domestic coupons due on Sept 21, 2021
that could trigger a disastrous ripple effect across global markets that are on
the path to a fragile recovery from the COVID-19 catastrophe. 

Evergrande international debt 

The Shenzhen, China-based
group is expected to default
on payouts totaling US$83 million on a 5-year USD-denominated bond of an
initial size of $2 billion. Evergrande share price has hit the gutter falling
about 50% in Hong Kong Stock Exchange, touching HK$2.27 on Sept 21, 2021,
against the recent peak of HK$4.56 on Aug 25, 2021. Even more disastrous for
global markets could be the Shenzhen-based company’s likely default on interest
payments on US$7 billion international debt that are due on Sept 29, 2021. A
host of international investors like Fidelity Asian High-Yield Fund, UBS (Lux)
BS Asian High Yield (USD) and HSBC Global Investment Funds - Asia High Yield
Bond XC have invested heavily in Evergrande debt. 

Reuters has reported that investors
staged a protest in front of Evergrande’s Shenzhen office last week
demanding immediate payouts. Yields on the US$2-billion bonds, maturing in
March 2022, have soared to 560% from about 10% at the beginning of the year.
Interest payments on US$7-billion bond issue on Sept 29 is also equally fraught
at this point in time, according to a report on CNBC.  

Evergrande stake  

“What happens on Thursday
(Sept 23) promises to be a seminal event for markets, one way or the other, bigger
perhaps than the FOMC outcome which will have occurred just a few hours
before,” according to Ray Attrill, head of foreign exchange strategy at the
National Australia Bank, as quoted by
CNBC. It will be just a technicality
that the actual default would be declared only 30 days after the Sept 23
date. 

Ranked 122nd on the Fortune
Global 500, the Evergrande Group has developed projects in about 170 cities in
China. Founded by Xu Jiayin in 1996 and incorporated in the Cayman Islands, it
has the headquarters in the Houhai Financial Center in Nanshan District of
Shenzhen in China’s Guangdong Province. Once the world’s largest real estate
companies, Evergrande sells apartments mainly to upper and middle-income
segments. 

Also Read: Evergrande
teeters on edge of default as $148m due 

Evergrande has accumulated
stake in sports (Guangzhou FC in which it shares ownership with Alibaba Group),
sports coaching (Evergrande Football School, the world's largest), mineral
water industry (Evergrande Spring), solar panels, pig farming, agribusiness,
baby formula, heath care industry, amusement parks, and resorts. 

Evergrande: ‘Not too big to
fail’ 

A Chinese media statement that
the behemoth generating 507.21 billion Chinese Yuan (US$78.4 billion) in annual
revenue is “not too big to fail” has spooked the global markets further.
However, some market watchers believe the
government cannot afford to let Evergrande insolvency happen. They believe
social unrest will force the hands of the authorities to intervene. Already,
homebuyers and investors have staged demonstrations in several places. Around
100 investors turned up at Evergrande’s Shenzhen HQ, demanding payouts on
overdue financial products leading to chaotic scenes, according to Reuters. 

Also Read: US
bans China Telecom to operate over national security concerns 

If the domestic debt gets
priority over the already due international payouts, the dollar-denominated
bonds may be a casualty. International FIIs that have invested
in the Chinese giant are on edge about the likely priority that the
domestic investors might get over the international lenders. 

Evergrande debt to
international funds 

According to Morningstar
Direct Data, the international funds that hold major stake in Evergrande
include Fidelity Asian High-Yield Fund, UBS (Lux) BS Asian High Yield (USD),
HSBC Global Investment Funds - Asia High Yield Bond XC, Pimco GIS Asia High
Yield Bond Fund, Blackrock BGF Asian High Yield Bond Fund, and Allianz Dynamic
Asian High Yield Bond. “We’ve seen a few funds adding to China Evergrande
between July and August 2021, given widening spreads and attractive
valuations,” CNBC quoted Patrick Ge, manager research analyst at Morningstar,
as saying.