Chinese property developer Evergrande, one of the world’s most indebted property developers with borrowings of around US$300 billion, is edging closer to defaulting on it’s loan obligations if reports that it has missed some final payment deadlines can be believed. Such a default would have a snowballing effect, especially in the property development sector, but fears of a major contagion event in financial markets seem to have eased considerably since Evergrande’s problems first came to light a few months ago.
The Chinese government has made it pretty clear from the outset that it has little appetite for bailing out global bond investors and that it would concentrate its efforts on supporting homeowners and the real estate market in general. Both the government regulator and the People’s Bank of China have been very vocal in their criticism of the Evergrande management team, blaming individual mistakes for a crisis which will not impact wider market stability. In other words, they will ringfence Evergrande as best they can to stop it’s troubles from infecting the rest of the Chinese property market so that if-and-when the developer officially defaults, the losers will be contained to on-shore and off-shore bondholders, who will take a severe haircut, and equity investors who will probably lose their entire investments.
Whilst not completely ignoring any potential ramifications of an Evergrande default, the global financial markets are taking a business as usual approach with any fallout expected to be limited to the lower investment grade bond markets. Global stock markets remain buoyant and typical risk-off trades are showing no signs of gaining traction in any financial markets. Investors are not taking the potential fall-out of an Evergrande default too seriously. Even reports yesterday out of HK that trading in another property developer, Kaisa, had been suspended amid reports that it also was unable to meet a payment deadline have failed to rattle investors.
If the global financial markets continue with these non-reactions to Evergrande headlines, then the headlines will gradually disappear. On the other hand, at the first sign of contagion, watch for risk-off instruments like the JPY crosses in the FX market (lower) or the precious metals (higher) to be leading indicators that the market is indeed more nervous than it’s making out to be.