Chinese markets slip after Fitch downgrades Evergrande to default

Chinese markets on Friday were lower after indebted developer Evergrande’s offshore bonds were downgraded to default, as mainland regulators sought to reassure investors that any fallout in the property sector would be contained.

Fitch rated Evergrande, the world’s most indebted developer, as “restricted default” on Thursday — the first ratings agency to do so — after the company did not respond to requests for information regarding overdue payments on coupons worth $82.5m. Kaisa, another heavily indebted developer, was also downgraded.

The ratings actions marked the most significant moment yet in a marathon liquidity crisis that has spread to other businesses across the country’s vast real estate sector and fuelled global concerns about the potential impact on China’s economy.

Mainland China’s CSI 300 index was down 0.6 per cent in the morning, broadly in line with losses across the Asia-Pacific region and the US as a rebound from Omicron-induced selling lost momentum.

Evergrande’s stock fell by as much as 3.9 per cent on Friday morning but wider real estate indices were little changed following Beijing’s efforts to calm anxiety by taking over the restructuring of the company.

On Thursday, People’s Bank of China governor Yi Gang said the Evergrande risks would not affect the normal functioning of markets in the short or long term and that the rights of investors would be respected, according to the Securities Times, a state-backed newspaper.

China’s central bank on Monday said it would free up Rmb1.2tn ($188bn) of liquidity for the banking system by cutting the share of deposits that financial institutions must hold in reserve by 50 basis points.

The Chinese Communist party’s politburo also pledged to maintain a proactive fiscal policy and “flexible” monetary policy in the coming year, according to state media.

The Hang Seng Mainland Properties Index, which tracks China’s biggest developers, including Evergrande, was flat at midday. That compared to a 0.5 per cent fall for Hong Kong’s benchmark Hang Seng index and a drop of about 0.3 per cent for Japan’s Topix.

“I think a fair interpretation is that the markets were already pricing in a very high probability of default,” said Logan Wright, a Hong Kong-based director at the Rhodium Group, a consultancy. “The second is that the market environment has been changed to some extent by the easing of measures and state policy.”

Yields in China’s distressed debt markets, which move inversely to bond prices, fell despite the bad news from Evergrande.

The average yield on a Bloomberg index of Chinese high-yield dollar bonds has fallen by nearly 1 percentage point since last Friday, when Evergrande revealed it would struggle to meet its obligations on $260m of debt.

But Wright said that while the policy response was positive, sales in the property sector still needed to stabilise and private credit to grow for there to be a proper rebound.

“Things that looked unsustainable became unsustainable,” said Wright, adding that the next question was “how far this contagion will spread”.

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