China Evergrande fears consume investors awaiting trading

FILE PHOTO: China Evergrande Centre building sign is seen in Hong Kong

NEW YORK/BOSTON/HONG KONG (Reuters) – Anxiety over the prospect of China Evergrande Group defaulting on its mountain of debt gripped investors on Tuesday ahead of two repayment deadlines, with much still unknown about the potential risks to banks in China and global markets.

A major test comes this week, with Evergrande due to pay $83.5 million in interest relating to its March 2022 bond on Thursday. It has another $47.5 million payment due on Sept. 29 for March 2024 notes.

Both bonds would default if Evergrande fails to settle the interest within 30 days of the scheduled payment dates.

Global markets were rattled on Monday as investors worried about the potential impact a default could have on the wider economy, dumping Chinese property stocks and seeking refuge in safe-haven assets.

Evergrande's shares tumbled another 10% on Monday after Chinese regulators warned that its $305 billion in liabilities could lead to widespread losses in China's financial system if its debts were not stabilised.

“I think (Evergrande's) equity will be wiped out, the debt looks like it is in trouble and the Chinese government is going to break up this company,” Andrew Left, founder of U.S.-based Citron Research and one of the world’s best known short-sellers, told Reuters.

“But I don't think that this is going to be the straw that breaks the global economy's back,” Left said.

Left in June 2012 published a report that said Evergrande was insolvent and had defrauded investors.

Citi analysts in a research note dated Tuesday said regulators may “buy time to digest” Evergrande’s non-performing loan problem by guiding banks not to withdraw credit and extend the interest payment deadline.

Those analysts said there was “mounting investor concern about potential risk spillover” from Evergrande's debt crunch, considering the potential liquidity drain for private developers due to increased difficulty in obtaining bank credit, and the contagion effect in the banking sector as they expect around 40.7% of China banks’ assets are related to the property sector.

Still, Citi said that while Evergrande's default crunch was a potential systemic risk to China's financial system, it was not shaping up as “China's Lehman moment”.

Shares in Evergrande, which has been scrambling to raise funds to pay its many lenders, suppliers and investors, closed down 10.2% at HK$2.28 on Monday, after earlier plummeting 19% to its weakest level since May 2010.

Regulators have warned that its $305 billion of liabilities could spark broader risks to China's financial system if its debts are not stabilised.

World shares skidded and the dollar firmed as investors fretted about the spillover risk to the global economy. U.S. stocks were sharply lower, with the S&P 500 down nearly 2%. [.N]

In any default scenario, Evergrande, teetering between a messy meltdown, a managed collapse or the less likely prospect of a bailout by Beijing, will need to restructure the bonds, but analysts expect a low recovery ratio for investors.

Michael Purves at Tallbacken Capital Advisors in New York said in a note to clients that China's foreign currency reserves were “arguably in better shape” now than they had been in the past, in the event Beijing chose to “throw money at Evergrande”.

(Reporting by Svea Herbst-Bayliss, Clare Jim, Tom Westbrook, Alun John and Anshuman Daga; Writing by Megan Davies and Sumeet Chatterjee; Editing by Stephen Coates)

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