Analysis: Investors Brace for a Great Fall in China

By Reuters
September 20, 2021 Updated: September 20, 2021

LONDON—International investors that have been piling into China in recent years are now bracing for one of its great falls as the troubles of over-indebted property giant China Evergrande come to a head.

The developer’s woes have been snowballing since May. Dwindling resources, set against $305 billion of liabilities, have wiped nearly 80 percent off its stock and bond prices. An $80 million bond coupon payment now looms next week.

What happens then is unclear. Bankers have said Evergrande will most likely miss the payment and go into a kind of suspended animation where authorities step in and sell some of its assets; but it could easily get messy.

“We will have to see what happens,” said Sid Dahiya, head of EM corporate bonds at abrdn, formerly Aberdeen Standard, in London, which holds a small sliver of the bonds.

“They are 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 is uncharted water,” said Dahiya.

Evergrande warned just over two weeks ago that it risked defaulting on its debt if it failed to raise cash. Since then it has said that no progress has been made with those efforts.

Analysts say the bigger picture is that if Evergrande—which has more than 1,300 real estate projects in over 280 cities—does topple, it will firmly dispel the idea that some Chinese firms are too big to fail.

An exterior view of China Evergrande Centre
An exterior view of China Evergrande Centre in Hong Kong, China on March 26, 2018. (Bobby Yip/Reuters)

It would probably still apply to big state-linked firms of course, but it comes too after Beijing’s clampdowns on big tech firms like Alibaba and Tencent wiped nearly a trillion dollars off its markets earlier in year.

Contagion from Evergrande has largely been confined to China’s other highly-indebted “high-yield” firms which have also slumped, but Hong Kong’s heavyweight Hang Seng also hit a 10-month low on Thursday showing there is some spread.

There are big name global funds involved too. EMAXX data shows that Amundi, Europe’s largest asset manager, was the largest overall holder of Evergrande’s international bonds, although it says it sold most of them before things turned really ugly.

The Paris-headquartered firm had just under $93 million of a $625 million bond due for repayment in June 2025 and around $300 million altogether back in March. It now holds $25 million in total. UBS Asset Management currently holds around $85 million of that 2025 issue, and is also one of the bigger overall holders.

Amundi’s Co-Head of EM Corporate & EM High Yield, Colm d’Rosario described the fundamental picture for many Chinese firms as intact “For now, however, we await the commencement of a restructuring process [of Evergrande] to gather more information.”

“It remains to be seen the scale of loss that investors will face.”


Back in April, Evergrande’s bonds were trading around 90 cents on the dollar, now they are closer to 25 cents.

People protest to demand repayment of loans and financial products at the Evergrande's headquarters in Shenzhen
People gather to demand repayment of loans and financial products as security personnel stand guard outside Evergrande’s headquarters in Shenzhen, Guangdong Province, China, on Sept. 15, 2021. (David Kirton/Reuters)

“It was always priced as a risky high-yield investment but what prices are telling you today is that there was some surprise that the government would let it go fully,” said Jeff Grills, the head of emerging market debt at U.S. fund Aegon Asset Management.

He added it has been a textbook example where investors had been lured in by the 10 percent-plus interest rate the bonds had provided.

According to the letter Evergrande sent to the Chinese government late last year, its liabilities involve more than 128 banks and over 120 other types of institutions.

A group of Evergrande bondholders has selected investment bank Moelis & Co. and law firm Kirkland & Ellis as advisers on a potential restructuring of a tranche of bonds, two sources close to the matter said.

Other funds also exposed to the bonds, include the world’s biggest asset manager BlackRock, as well dozens more, such as, Fidelity, Goldman Sachs asset management, and PIMCO.

Major U.S. financial firms including BlackRock and Goldman, and the likes of Blackstone, are due to meet with officials from China’s central bank and its banking and securities regulators later on Thursday, Sept. 23.

Debt analysts hope that the damage might not be too widespread. The holdings are tiny compared to the overall size of those big investment firms. Also, only $6.75 billion of near $20 billion of Evergrande debt is included on JPMorgan’s CEMBI index, which big emerging market corporate debt buyers use as a kind of shopping list.

Others are still wary though, of the wider signal it sends.

“This is part of a self-reinforcing dynamic in which rising insolvency risk sets off financial distress costs, which in turn increase insolvency risk,” Michael Pettis, a nonresident senior fellow at the Carnegie–Tsinghua Center for Global Policy, said on Twitter.

“Until regulators step in and credibly address insolvency risk across the board, conditions are likely only to deteriorate,” Pettis said.

Some veteran emerging market crisis watchers also think the troubles still have further to run.

“This unwind hasn’t even really started,” said Hans Humes at EM debt-focused hedge fund Greylock Capital.

By Marc Jones