Market Alert — Potential Evergrande Default Has Global Investors on Edge
Global investors and Chinese authorities alike are preparing for the potential default and downfall of embattled China Evergrande Group (Evergrande or the Company). Shenzhen-based Evergrande is more than $300 billion in debt and, as of Thursday, September 23, 2021, failed to make an $83 million interest payment due on a $2 billion dollar-denominated bond. The looming collapse of Evergrande presents major risks to its bond and equity investors – including international asset managers – and to local Chinese communities. The Company’s default could also have a ripple effect across markets globally.
Evergrande, China’s second-largest property developer, is big indeed. The Company has about 800 real estate projects in 200 cities throughout every province in China, financed in part by approximately $19 billion in publicly traded dollar-denominated bonds outstanding. Evergrande is currently suffering a cash crunch, however, as recent policies imposed by Chinese President Xi Jinping have sought to deleverage China’s burgeoning real estate industry by capping lending.
While Evergrande missed its September interest payment, the Company has 30 days to cure before bond investors can declare a default. Evergrande’s situation is precarious, however, because even if the Company meets its September obligation, albeit late, a subsequent interest payment is immediately due in October. The Company’s likely inability to continue making these payments has caused the bond’s yield to rise more than 500 percent, meaning that the bond’s price has plummeted due to declining market demand. Likewise, Evergrande’s stock, traded on the Hong Kong exchange, is also down over 80 percent year-to-date.
Although it is possible that the state could provide Evergrande with financial assistance, the potential for moral hazard suggests that the Chinese government will stay on the sidelines. As of Friday, September 24, 2021, Chinese authorities have asked local governments to prepare for Evergrande’s potential downfall, suggesting that a large-scale bailout is not planned.
Evergrande’s collapse could, in theory, rival or exceed that of Lehman Brothers in the United States in 2008, according to some commentators. While the comparison has some merit (Lehman Brothers was the fourth-largest investment bank at the time), the Evergrande situation is different because it does not involve a systemic flaw in the capital markets. Rather, Evergrande’s woes are indicative of a heavily leveraged industry – a condition that is well-known. This does not mean, however, that global risk is nonexistent. For example, U.S. mutual funds and exchange traded funds invested in China, according to the Wall Street Journal, held $43 billion in net assets as of August 2021 – a 44 percent increase year-over-year. Construction firms and other vendors based in the U.S. that work on projects internationally could also be affected.
The attorneys at Giarrusso Law Group LLC continue to monitor these developments. On behalf of investors, we routinely handle all manner of claims related to investment losses. If you have a question about this announcement or any other matter, please contact us at (201) 771-1115 or info@gialawgroup.com for a free and confidential consultation.