Evergrande’s crisis: Will PSX witness any shock?

September 23, 2021 (MLN): Evergrande- China’s second-largest real estate player has found itself into financial trouble over the past few months as the ongoing calendar year marks significant regulatory changes in China under the banner of the “Common Prosperity Initiative.”

In general, the ongoing delta has directly hit the companies in Tech space, Real estate, and Education. Particularly, the initiative of regulatory changes has also been taken to rein back the debt levels and speculation in the property sector.

Evergrande is characterized as the borrow-to-build business model and was once China's top-selling developer. The ongoing chaos has made investors worry that the jolt could be felt by the creditors including banks in China and abroad.

Though analysts have been downplaying the risk that a collapse would result in a "Lehman moment", or a systemic liquidity crunch.

As per the recent development, China Evergrande Group will make it a top priority to help retail investors redeem their investment products, its chairman said, as uncertainty looms over a bond interest payment the indebted property developer is due to make on Thursday.

Chairman Hui Ka Yan's statement at a late-night meeting on Wednesday came after the developer said it had resolved a coupon payment on a domestic bond, pushing the company's stock price to its biggest single-day percentage rise in a year, a report by Reuters noted.

Analysts said the moves underscored political pressure on Evergrande, whose liabilities run to 2% of China's gross domestic product, to contain the fallout from its credit crunch and protect mom-and-pop investors over professional creditors.

Global markets have been on tenterhooks in recent weeks as looming payment obligations of Evergrande, which has a $305 billion mountain of debt, triggered fears its difficulties could pose systemic risks to China's financial system.

The company has $83.5 million in dollar-bond interest payments due on Thursday on a $2 billion offshore bond and a $47.5 million dollar-bond interest payment due next week.

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

With regards to Pakistan, Evergrande’s episode is unlikely to form a contagion, at least for now, where Chinese authorities mulling for an amicable resolution of the issue however, the possibility of the direct bailout is yet far-fetched. Hence, volatility shall persist in EM bonds space in the near term, possibly resulting in local authorities realizing higher yields on planned US$1-1.5bn Sukuk issuance in October’21, to retire $1bn bond, Hamza Kamal Senior Investment Analyst at AKD Securities said.

That said, spillover on commodities from the aforementioned developments is materially positive for local steel players where scrap prices have already spiraled down by 2.4% since the beginning of the month. For Cement, coal prices are likely to remain elevated in the near term however, the lack of future investments in coal power plants by China is material positive, he added.

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