The Evergrande creditors are piling up and there is no relief in spreads:
The world’s most indebted developer needs to pay a $45.2 million coupon on Wednesday for a dollar bond that matures 2024, Bloomberg-compiled data show. The payment has a 30-day grace period before default could be declared, according to the note’s offering memorandum.
Some holders also maintain Evergrande is a guarantor of a dollar bond that matures Sunday, Bloomberg reported Tuesday. They’re forming a committee to press their claims in the event of a default, according to people familiar with the plans. Separately, Evergrande has made no public statements on an $83.5 million coupon that was due Sept. 23 and at least several holders had said they hadn’t received payment.
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The PBoC is still not interested in easing. Goldman:
On the overall economy and monetary policy stance, in the Q3 statement, PBOC highlighted that domestic economic growth is still “not solid and imbalanced”, and reiterated the need to maintain a stable broad credit growth (same as the discussion in the late August meeting). PBOC would also continue to prioritize support to the real economy, and better utilize the RMB300bn relending quota to increase lending to small to medium-sized companies and individual businesses. In addition, similar to the discussion in Q2 monetary policy report, PBOC highlighted it would support banks to replenish capital to enhance banks’ capability to support the real economy and prevent financial risks. We think the broad description on monetary policy stance appeared more supportive relative to the Q2 statement, but consistent with the discussion in the late August meeting.
On the housing market, in the statement PBOC mentioned to “promote healthy development of the housing market and protect home buyers’ rights”. The mention of“protecting home buyers’ rights” is new and we think it might refer to the recent news related to Evergrande (see our discussion on its macro implications here). This further illustrates policymakers’ commitment to properly handling this event and mitigating risks to the overall housing market in our view. The discussion on“promoting healthy development of the housing market” does not necessarily imply broad easing of property policies as this is a repeated line in recent policy communications on the property market.
But Beijing is on the phone:
Beijing is prodding government-owned firms and state-backed property developers such as China Vanke Co Ltd (000002.SZ) to purchase some of embattled China Evergrande Group’s (3333.HK) assets, people with knowledge of the matter said.
Authorities are hoping, however, that asset purchases will ward off or at least mitigate any social unrest that could occur if Evergrande were to suffer a messy collapse, they said, declining to be identified due to the sensitivity of the matter.
TS Lombard does not expect any policy panic:
Evergrande is collapsing. China’s second-largest developer by sales and largest in terms of total debt and liabilities is no longer a viable business. The extent of the macro and market spill-overs both on the Mainland and offshore depends on the degree of central government intervention. Whatever happens to Evergrande, the event likely marks the start of a new development model for the property sector, one featuring greater state involvement, lower investment and entailing slower economic activity.
Beijing has the tools and incentives to limit Evergrande risk. Central authorities engineered the current sector-specific credit crunch by introducing tougher rules on developer leverage–and bank lending to developers and mortgage buyers. Evergrande itself is a well-known grey rhino (a difficult to resolve risk but one that can be seen from some way off). Authorities have been aware of the dangers associated with the company for a number of years. Our contacts in Beijing report that restructuring discussions took place with government officials in early 2021.
The other leading indicator of property investment–land sales (no new builds if there is no land)–has fallen consistently over the past six months. Taken together, a real estate investment slump is already baked in (chart 2 above). We expect property FAI to fall to record low growth rates of 2-5% yoy over the next nine months.
China growth downgrade. The direct growth impact from lower property investment, which accounts for 17% of GDP, is significant. Second-order effects via household confidence and wealth effect, lower land sales revenue for local government spending and less credit owing to higher bank NPLs all add to the downside.
Taken together Evergrande disruption could lower 2022 GDP growth by 1-4 ppt, depending on the extent of government involvement in restructuring. We downgrade China growth from 8.5% yoy to 8.2% yoy in 2021 and from 5.5% yoyto 5.3% in 2022. Risks are to the downside.
Fiscal stimulus coming slowly. The July Politburo meeting explicitly called for accelerated local-government bond issuance and spending. We expect an increase in local government spending and infrastructure FAI in Q4/21. Policymakers’ frequent references to “cross-cycle management”suggest that Beijing is targeting stability in 2022 ahead of the Party Congress and that the real economic impact of fiscal spending will come in H1/22 rather than the remainder of this year. We expect the budget deficit as a share of GDP to fall back towards 5% over the next six monthsfrom 4% now as fiscal activity takes the strain of a weaker economy.
The PBoC is managing interbank rates and liquidity. The bank has set an implied TSF growth target of 11% yoy for H2/21. We do not expect a policy rate cut, but we think a 50 bps RRR reduction is likely by mid-November. And we also reckon that authorities will make greater use of OMO and targeted relending programs to smaller banks.
Property investment and wider growth deceleration is the likeliest channel for global contagion: onshore falling residential prices pose the largest risk to our outlook–not even an authoritarian government cannot force people to buy houses. A shift in sentiment and falling prices in tier 3 cities and below, which account for 70% of property sales by volume, would put the pre-sales model under much greater pressure and significantly increase the hit to consumption via the wealth effect. There are already signs of weakness in tier 3 cities: local authorities havebegun to loosen purchase restrictions to provide support to the market.
Beijing’s tough stance, the sheer size of Evergrande, its hidden debt and the importance of property to the Chinese economy all mean that a misstep is possible–which would have grave consequences for China and global growth. The longer central authorities refrain from backstopping Evergrande’s pre-sales, the greater the probability of damage to the real economy and financial spill-overs.
This is only the beginning of the property sector crackdown. The shift towards “common prosperity” marks the start of change in China’s politic economic objectives. The Party is focused on delivering slower, sustainable and more equitable growth while lowering carbon emissions,up grading manufacturing and tech and reducing financial risks. The disordered credit-intensive growth evident in the property sector runs counter to all major government objectives. In the past nine months, China has begun important reforms to property tax and land sales revenue collection and introduced strict regulation of urban development. The property sector share of China credit and growth is in terminal decline.
I don’t expect it to be that smooth. It looks to me like the counterparty risk cat is already out of the bag so “three red lines” is going to overshoot into a property hard landing. I, therefore, expect a policy panic at some point too that includes rate cuts. Though not until the energy crunch is resolved.
But even that does not mean the end of the deleveraging campaign for property. I agree that that will go on and any stimulus will be a cyclical pulse within a secular trend lower.
In, short, Australia’s iron ore era is also in “terminal decline”.