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International Investors Prepare for Big Drop in China, Real Estate News, ET RealEstate


LONDON: International investors who have crowded into China in recent years are now bracing for one of its big falls as the problems of over-indebted real estate giant China Evergrande come to a head.

The developer’s woes have snowballed since May. The decrease in resources against 2,000 billion yuan ($ 305 billion) in liabilities wiped out nearly 80% of its stock and bond prices, and a bond coupon payment of $ 80 million is now looming next week.

What happens then is not clear. Bankers said he would most likely miss the payment and get into some sort of suspended animation where authorities step in and sell some of his assets, but it could easily get messy.

“We’ll have to see what happens,” said Sid Dahiya, head of emerging market corporate bonds at abrdn, formerly Aberdeen Standard, in London, which owns a small portion of the bonds.

“They’re probably working on a deal in the background, but we don’t have any clarity and we don’t really have any precedents, so it’s unexplored water.”

Evergrande warned just over two weeks ago that he risked defaulting on his debt if he failed to raise funds. Since then, he said no progress has been made in these efforts.

Analysts say the big picture is that if Evergrande – which has more than 1,300 real estate projects in more than 280 cities – collapses, it will firmly dispel the idea that some Chinese companies are too big to fail.

That would likely still apply to large state-linked companies, of course, but it also comes after Beijing’s crackdown on big tech companies like Alibaba and Tencent wiped out nearly $ 1 trillion of its money. markets earlier in the year.

Evergrande’s contagion was largely confined to other heavily indebted high-yield Chinese companies which also collapsed, but Hong Kong heavyweight Hang Seng also hit a 10-month low on Thursday, showing it there is a certain gap.

Large global funds are also involved. EMAXX data shows that Amundi, Europe’s largest asset manager, was the largest global holder of Evergrande’s international bonds, although it is likely that it has sold at least some before that things don’t really go wrong.

The Paris-headquartered company had just under $ 93 million of a $ 625 million bond to repay in June 2025, according to EMAXX data. UBS Asset Management was the second holder of this issue with $ 85 million as well as one of the largest holders overall.

Amundi EM Corporate & EM High Yield co-head, Colm d’Rosario described the fundamental image of many Chinese companies as intact “For now, however, we are awaiting the start of a restructuring process (d ‘Evergrande) for more information. “

“It remains to be seen the magnitude of the losses investors will face.”

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In April, Evergrande bonds were trading around 90 cents to the dollar, now they are closer to 25 cents.

“It has always been rated as a risky investment with a high return, but what the prices are telling you today is that there was some surprise the government let it go completely,” said Jeff Grills. , Head of Emerging Markets Debt for US fund Aegon Asset Management. .

He added that this was an example of a textbook where investors were drawn to the 10% interest rate plus bonds provided.

According to the letter Evergrande sent to the Chinese government at the end of last year, its commitments relate to more than 128 banks and more than 120 other types of institutions.

A group of Evergrande bondholders has chosen investment bank Moelis & Co and law firm Kirkland & Ellis as advisers on a possible restructuring of a tranche of bonds, said two sources familiar with the matter.

Other funds also exposed to bonds include the world’s largest asset manager BlackRock, as well as dozens of others such as Fidelity, Goldman Sachs Asset Management and PIMCO.

Major U.S. financial firms, including BlackRock and Goldman, as well as Blackstone, are due to meet with officials from China’s central bank and its banking and stock regulators later Thursday.

Debt analysts hope the damage may not be too extensive. The holdings are tiny compared to the overall size of these large investment firms. Additionally, only $ 6.75 billion of Evergrande’s nearly $ 20 billion of debt is included in JPMorgan’s CEMBI index that corporate debt buyers in large emerging markets use as a sort of checklist. races.

Others are still wary of the larger signal it sends.

“This is part of a self-reinforcing dynamic in which increasing insolvency risk triggers costs of financial distress, which in turn increase insolvency risk,” said Michael Pettis, senior non-executive investigator. -resident of the Carnegie-Tsinghua Center for Global Policy, on Twitter.

“Until regulators step in and credibly deal with the risk of insolvency at all levels, conditions are likely only to deteriorate.”

Some seasoned emerging market crisis watchers also believe that the problems are yet to last.

“This unwinding hasn’t even really started,” said Hans Humes of emerging debt-focused hedge fund Greylock Capital.


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Mary Cashion

The author Mary Cashion