Evergrande’s woes: investors take opposite sides as they size up the potential impact ahead of looming repayment deadline

BCA Research warned that investors should not underestimate the “determination” of Chinese policymakers to clamp down on property

Taking a more sanguine view is Ray Dalio of Bridgewater Associates, who said the developer’s debt is “manageable”

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A map showing China Evergrande Group’s development projects in Beijing on Tuesday, September 21, 2021. Photo: AP

Published: 3:33pm, 22 Sep 2021Updated: 7:31pm, 4 Oct 2021

Global investors are divided in their assessments of the Chinese developer China Evergrande Group’s debt woes, as well as the scope of its contagion effect on equity prices and the financial system of the world’s second-largest capital market.

BCA Research of Montreal, an independent investment research firm founded in 1949, warned that investors should not underestimate the “determination” of Chinese policymakers to clamp down on the property sector, and that they may become “overconfident in their capability to stabilise financial markets.” Taking a more sanguine view is Ray Dalio, the founder of the world’s largest hedge fund Bridgewater Associates, who said the developer’s debt is “manageable.”

“The near-term response in the equity market is likely to be very negative,” BCA Research’s strategist Sima Jing wrote in a September 21 note to clients. “China-related asset prices will not stabilise until policymakers decisively and significantly dial-up their reflationary response.”

The divergent views underscore how global investors are sizing up whether the financial viability of Evergrande, with US$300 billion of outstanding liabilities, is tantamount to what has been dubbed China’s “Lehman moment,” referring to the potential collapse of a large financial institution that requires a state bailout. Evergrande, which faces a US$119.4 million liquidity test this week when interest payments are due on two notes, said it has reached an agreement with bondholders to pay at least the smaller, renminbi-denominated part of the obligation valued at 232 million yuan (US$36 million).

Investors and customers of various wealth management products sold by China Evergrande Group gathered at the company’s headquarters in Shenzhen on September 16, 2021. Photo: AFP.

Evergrande shares have collapsed by 84 per cent this year, while its dollar-denominated bonds crashed to distressed levels of about 30 cents on the dollar. The Hang Seng Index fell 3.3 per cent on Monday to near a one-year low following a sell-off in bank and property stocks. Markets in Hong Kong are closed on Wednesday for a holiday.

The Shenzhen-based developer, whose liabilities are estimated at 2 per cent of China’s gross domestic product, is roiling the market as it started asking lenders for reprieve this week. Losses in the firm’s equity and bonds have accelerated this month, without any significant intervention from regulators.