China’s Evergrande fiasco: Could it spill over to Australia?

Highlights

  • China’s largest property group Evergrande faces a possible default on debt payment.
  • The Chinese builder debt ballooned to 2 trillion yuan (or US$310 billion) by June 2021.
  • The company has to pay interest dues of US$131 million this week.
  • Evergrande’s subsidiary has assured to make a scheduled payment.
  • Evergrande crisis has fueled a fear of a contagion across global markets.

The future of China’s largest property group Evergrande hangs in the balance as the real estate giant faces its worst liquidity crisis. The crisis has shaken the Chinese as well as global markets, reminding about the dramatic collapse of “Lehman Brothers” in 2008, when US investment bank went bankrupt due to the subprime mortgage crisis.

Could China's Evergrande Fiasco spill over to Australia?
 

Evergrande, the world’s largest real estate borrower, is on verge of a possible default as its outstanding debt ballooned to 2 trillion yuan (or US$310 billion) by the end of June quarter of 2021, the largest by any publicly listed real estate company globally.

Testing week for Evergrande

This week is going to be critical for the beleaguered company as it faces a daunting task to pay interest dues of US$83.5 million to its March 2022 bondholders on September 23, 2021. Adding to it, Evergrande has to make another payment of US$47.5 million for its March 2024 notes, due on September 29.

If the company fails to make payment of the interest within a period of 30 days, both bonds would default, which in turn will affect negatively not only China’s property market but also global markets alike.  

In a much-needed respite to the company, Evergrande has reportedly reached a deal with its bondholders. The company’s subsidiary Hengda Real Estate Group Co said this morning that it would make a scheduled bond interest payment on its September 2025 bond on time on September 23. The company, however, did not give any clarity on dues payments related to March 2022 bonds and March 2024 notes.

However, the risk of default still looms as the Chinese builder faces mammoth dues of 240 billion yuan (US$37.3 billion) in the next one year, which is nearly three times the company’s cash reserves worth 86.8 billion yuan (US$13.5 billion).

Will China’s central bank’s liquidity boost advert crisis?

In a bid to soothe the nerves after Evergrande’s fiasco, China’s central bank is continuously injecting liquidity in the system to boost sentiment. Evergrande’s debt woes rattled equities globally, with US, European and Asian markets faced hefty selling on Monday. Chinese shares were mostly unaffected as they were closed for public holidays on the first two days of this week.

The People’s Bank of China infused around 120 billion yuan into the banking system via reverse repurchase agreements to boost liquidity. It sold 100 billion yuan on both Friday and Saturday, while the first couple of days this week were holidays in China.

Is Australian market in trouble?

While fears about the spillover from the potential collapse of Evergrande roiled Australian stock market on Monday, the benchmark index, the ASX 200, gained some ground on Tuesday. The news of the negotiation between Evergrande and its bondholders gave a strong boost to the Aussie market on Wednesday, helping the ASX 200 close 0.3% higher. However, investors need to be cautious as the Evergrande crisis is yet to be over.

Australia’s central bank on Wednesday warned that rising household debt, merely based on soaring property prices, may lead to financial instability.

“Sharp rises in housing prices that are not associated with fundamentals could lead to instability by raising the risk of a subsequent decline,” RBA assistant governor Michelle Bullock reported said in an online speech on Wednesday.

Bottomline

Given that China is Australia’s biggest bilateral trade partner, the potential fallout of Evergrande will adversely impact the Aussie financial markets. However, the Australian market is in a better position to absorb a potential shock from a big company default, which is evident from a strong rebound in the equity market.

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