This is why you should never invest in China. There is no transparency.
Evergrande has descended into an every rumour debacle in which interest now run the show as Beijing dithers. Zero Hedge wraps it nicely:
Update (0810ET): Piling on to the chaotic swings in Evergrande, Bloomberg reports that the embattled property developer’s electric-car unit has missed salary payments to some of its employees and has fallen behind on paying a number of suppliers for factory equipment, according to people familiar with the matter.
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Most employees at Evergrande NEV are paid at the start of every month and again on the 20th, however for some mid-level managers, the second installment for September hasn’t arrived, the people said. Several equipment suppliers, meanwhile, began withdrawing their on-site personnel from the Shanghai and Guangzhou sites as early as July after payments for machinery in Evergrande NEV’s factories weren’t made.
This is clear evidence that the company’s financial fragilities are having an impact beyond its core business.
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It has been a rollercoaster session for Evergrande this morning.
It started off optimistically enough, with Evergrande stock – which hit an all time low earlier this week in Hong Kong trading – soaring as much as 30% on furious short covering in early trading following news that the company would make an interest payment on local bonds…
… even though the big question for today was whether foreign creditors, who are also owed an $83.5 million interest payment Thursday, would get their money.
Evergrande pared its gains before the close as selling shareholders took advantage of the price spike to continuing unloading shares, although the mood was decidedly more hopeful than on previous day, and pushed US equity futures sharply higher this morning.
Said mood became even more euphoric just after 5am ET when Bloomberg blasted a flashing red headline for a report that China had told Evergrande to avoid a near-term dollar bond default…
… in which Bloomberg reported that according to “a person familiar with the matter”, financial regulators in Beijing “issued a broad set of instructions to China Evergrande Group, telling the embattled developer to focus on completing unfinished properties and repaying individual investors while avoiding a near-term default on dollar bonds.” The report added that “in a recent meeting with Evergrande representatives, regulators said the company should communicate proactively with bondholders to avoid a default but didn’t give more specific guidance.”
And while even Bloomberg conceded that the regulatory guidance “offers few clues about what an Evergrande endgame might look like, it does suggest China’s government wants to avoid an imminent collapse of the developer that might roil financial markets and drag down economic growth.”
In other words, even more good news, with Beijing explicitly demanding that Evergrande should make foreign creditors whole and the implication being that an Evergrande collapse may be avoided.
Or so the market though, until exactly one hour later when in a separate flashing red headline…
.. Bloomberg informed the world of a story published away in the WSJ, which delivered just the opposite news, namely that “China Makes Preparations for Evergrande’s Demise” and that “authorities are asking local governments to prepare for the potential downfall of China Evergrande Group.” The report, which also cited anonymous “officials familiar with the discussions” who may or may not have major financial exposure to Evergrande – which we assume are different anonymous sources from the ones Bloomberg used – signaled “a reluctance to bail out the debt-saddled property developer while bracing for any economic and social fallout from the company’s travails.”
The WSJ then notes that “officials characterized the actions being ordered as “getting ready for the possible storm,” but it also gives the suggestion that a nationalization of Evergrande is on the table, quoting those same officials as “saying that local-level government agencies and state-owned enterprises have been instructed to step in only at the last minute should Evergrande fail to manage its affairs in an orderly fashion.”
They said that local governments have been tasked with preventing unrest and mitigating the ripple effect on home buyers and the broader economy, for example by limiting job losses—scenarios that have grown in likelihood as Evergrande’s situation has worsened.
The report also notes that local governments have been ordered to “assemble groups of accountants and legal experts to examine the finances around Evergrande’s operations in their respective regions, talk to local state-owned and private property developers to prepare to take over local real-estate projects and set up law-enforcement teams to monitor public anger and so-called “mass incidents,” a euphemism for protests, according to the people.”
In other words, just as we explained in “How Evergrande Became Too Big To Fail And Why Beijing Will Have To Bail It Out“, Beijing will be dragged in -kicking and screaming – with a bailout of Evergrande one way or another, in order to prevent Beijing’s biggest nightmare – mass social unrest.
That said, a nationalization scenario does not answer today’s $640 billion question: will Evergrande’s offshore bondholders be made whole, or will the upcoming nationalization be part of a broader balance sheet restructuring.
What we do know is that as of 645am ET this morning, Bloomberg also reported that two holders of a China Evergrande Group dollar bond with a coupon due later Thursday “said they hadn’t received payment as of 5pm Hong Kong time” with Bloomberg adding that “there was no immediate reply from Evergrande to questions about the interest payment.”
In short, total chaos continues, market reaction notwithstanding, and we expect it will get far more confusing from here as Chinese “sources” use reputable US mainstream media sources to not only convey what is going on but to allow themselves (and their conflicts of interest) an exit mechanism. After all, it’s not as if anyone will prosecute them for insider trading.
Capping us off, the WSJ report also contained this:
Policy makers are also considering gradually easing some property curbs in smaller Chinese cities, such as making ownership of a second home easier, according to one of the people. They could also moderate some of the stringent deleveraging measures on property developers that helped push heavily indebted Evergrande toward the precipice in recent months, this person said.
Mwahaha. Already? There’s still more at ZH:
While the market has clearly moved on from the Evergrande debacle, perhaps assuming that all is now contained while completely ignoring the potentially catastrophic consequences for China’s US$60 trillion property market (Goldman has just come out with a must read report “Investing under a new regulation regime (Part 4): A US$60tn property dilemma” available to pro subs in the usual place), the reality is that the company is about to default on some $18 billion in foreign debt.
Nearly a full day after we said that the fate of the offshore bondholder fate would be decided in hours…
… Reuters reports that there is still no news, and – worse – Group’s dollar (offshore) bondholders were still waiting for information about a key interest payment due Thursday, “with some holders having given up hope of getting a coupon payment by the deadline, a source familiar with the matter said.” Adding insult to injury, as of midnight Hong Kong time, there had been no announcements by Evergrande about the payment, confirming that the company will simply pretend it never had to make a payment.
And while the source added that the property developer was “instead expected to provide more information in the coming month”, that’s not how bondholder indentures work and unless there is a resolution in the next few hours, Evergrande will enter it 30 day grace period while rating agencies S&P and Moody’s will declare in Selective Default, i.e., a state were a borrower fails to pay one or more of their obligations but continues to meet other payment obligations. Semantics aside, a selective default is a default for the affected bondholder group, which in Evergrande’s case includes over $18 billion in dollar-denominated bonds.
While Evergrande negotiated a resolution on its local interest payment due today, it was also due to pay $83.5 million in interest on a $2 billion offshore bond on Thursday and also has a $47.5 million dollar-bond interest payment next week. So far it has not made the payment and looks unlikely to make it.
Both bonds would default if the company, which has outstanding debt of $305 billion, fails to settle the interest within 30 days of the scheduled payment dates.
The company has yet to make an announcement about its plans for Thursday’s offshore bond coupon payment and a company spokesperson did not respond to requests for comment.
The silence from Evergrande flies in the face of an earlier report from Bloomberg according to which Chinese regulators had asked Evergrande executives to avoid a near-term default on its dollar bonds and to communicate proactively with bondholders. It appears that report was false.
“They don’t want a default right now,” said Connor Yuan, the head of emerging market flow credit trading for Asia at Goldman Sachs. “Given there is a 30-day grace period, I think today it’s very likely the coupon won’t be made but it is possible that they try to get a deal done in the next 30 days.”
Meanwhile, conflicting with the Bloomberg report, the Wall Street Journal reported separately on Thursday that Chinese authorities were asking local governments to “prepare for the demise” of Evergrande. The WSJ said local governments had been “ordered to assemble groups of accountants and legal experts to examine the finances around Evergrande’s operations in their respective regions.” They have also been ordered to talk to local state-owned and private property developers to prepare to take over projects and set up law-enforcement teams to monitor public anger and “mass incidents”, a euphemism for rioting.
Looking ahead, there are two camps: one is populated by pessimists like Jim Chanos who warned that an Evergrande default would be worse than Lehman due to the downstream shock this event would have on China’s $60 trillion property market. Earlier today, the Swiss central bank said Evergrande should not be dismissed as a small, local problem. In the other camp we have optimists like Jean-Yves Fillion, chief executive officer of BNP Paribas, who told CNBC that “Evergrande is a serious situation but we see it as quite contained both in terms of the sector, mainly Chinese real estate, and mostly Chinese counterparties. Historically we have seen the Chinese administration taking care of these type of situations and resolving them. The linkages between the Evergrande situation and the strong U.S. equity market we see as not very significant.”
We’ll see if that’s true but for now, it appears that our prediction that “Beijing will pay local bondholders and soft nationalize Evergrande, but will avoid allegations of backsliding on tightening/deleveraging promises and and “common prosperity” by stuffing foreign creditors” will be proven accurate.
Meanwhile, over in China, Evergrande Chairman Hui Ka Yan – who just a few years ago was China’s second richest man behind Jack Ma – did not make any mention of foreign creditors, but instead urged his executives late on Wednesday to ensure the delivery of quality properties and the redemption of its wealth management products, which are held by millions of retail investors in China.
In other words, it seems that a default on foreign bonds has already taken place.
Some analysts say it could take weeks for investors to have any clarity about how the Evergrande situation will resolve.
“The company could restructure its debts but continue in operation, or it could liquidate,” wrote Paul Christopher, head of global market strategy at Wells Fargo Investment Institute. In either case, investors in the company’s financial instruments would likely suffer some losses, he wrote, adding that “in the event of a liquidation, however, Chinese and global investors could decide that the contagion could spread beyond China”
But the elephant in the room is not the write down of a modest $18 billion in foreign bonds to the likes of Blackrock, for whom this is a peanuts. The real question is how an Evergrande failure would impact confidence in China’s property sector and whether it will lead to a sharp drop in what has traditionally been the world’s most valuable asset, one which represents some 70% of China’s urban household net worth.
At an eerily quiet construction site in eastern China, worker Li Hongjun said Evergrande’s crisis meant he will soon run out of food while Christina Xie, who works in the southern city of Shenzhen, feared Evergrande had swallowed her savings.
“It’s all my savings. I was planning to use it for me and my partner’s old age,” said Xie. “Evergrande is one of China’s biggest real estate companies … my consultant told me the product was guaranteed.”
In short, media is now reporting on Chinese sources that have leaked plans for everything from a full blow bailout to doing nothing at all.
Anybody that tells you that they know what’s coming here is a charlatan. This is rumourtage with Chinese characteristics.