Sunday, October 17, 2021

China debt ‘going nowhere fast’

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CNN’s Tracy Connor examines China’s woes as it struggles to control the country’s debt, including a bond default that might even trigger forced convertibility.

Never mind debt and all that. China isn’t going bankrupt any time soon.

The credit rating firm Standard & Poor’s weighed in Tuesday, saying Beijing is unlikely to step in to keep the state-owned Hong Kong-listed developer Evergrande Group in the capital — or even a Shanghai-listed sister company — even if it defaults on $1.7 billion in domestic bond payments due next month.

Moody’s Investors Service and Fitch Ratings already had warned investors that if Evergrande, China’s fourth-largest property developer, struggles to make those payments, it might default on its bonds.

And the “distressed” bonds Evergrande sold last year are carrying higher yields than the other $10 billion the company raised in 2017 and 2018, making it even more of a financial basket case, according to Fitch.

Related: Evergrande’s worst nightmare is real — and getting worse

Despite Beijing’s best efforts, Evergrande has been beset by weak results, ballooning debt, falling sales and a board that is set to be emptied by a shareholder rebellion.

Related: China’s debt does not affect the economy, WSJ claims

The company’s latest profit warning wiped out the gains made in November, wiping out more than 50% of the group’s market value in a single session.

In October, Evergrande had already scaled back its delivery targets for this year. Then, its woes deepened last week, when it delayed the release of its third-quarter results until December because of its “evolving financial and operational situation.”

But ratings agencies are expecting China to try and help Evergrande get through this so it can keep its annual growth target — 6.5% to 7% — on track.

“S&P believes that a debt restructuring does not seem likely,” the ratings agency said Tuesday. “While Evergrande’s situation is a severe one, this is a weakness of Chinese corporate credit culture, rather than a structural lack of credit discipline.”

Evergrande is one of a group of companies hit by tightening liquidity, prompting ratings agencies to warn that any company based in the island of Hong Kong may have to be considered a default risk.

Related: The trigger that will make mainland China look after Hong Kong

Having lent billions to Evergrande, and saw its debt soar to 810 billion yuan ($116 billion) last year, local governments can be held responsible for any debt problems, Moody’s said last week. That means, it explained, “the local authorities could be forced to limit support for the group, potentially forcing capital outflows and a liquidity squeeze, for example.”

Read more: Chinese trust company faces default after ‘black hole’ found

Evergrande has a $1.7 billion dollar bond payment due Dec. 22. Yields are reaching a record high ahead of that.

Analysts fear it could be the first official default in Hong Kong, and that worries that it will set a precedent.

China’s State Council has suggested issuing documents to prevent Hong Kong companies from defaulting, such as including requirements for their local government to support the debt, local media reported on Friday.

Experts have even suggested that Hong Kong needs to consider a default resolution plan to address a potential insolvency wave in the territory.

But China’s economic future could depend on a debt-fuelled construction boom in the mainland — where Evergrande has set up 1,110 shopping malls across 40 cities since launching its first property development in 2003.

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