Evergrande Renegotiates Debt as China Prepares for Fallout

Ibeth Rivero

Chinese real estate company Evergrande recently claimed that issues regarding the payment of its debt were settled through negotiations, though the company wasn't clear regarding the terms of the payment and did not provide total reassurance to investors. Concerns remain that there is another payment deadline approaching and it is not still clear how the company will comply with these additional financial obligations.

In an attempt to reassure its investors, Evergrande's chairman commented that the company is making it a top priority to help retail investors redeem the investment products they have acquired from the company. Despite this, analysts seem to be confident in their grim forecasts for Evergrande, considering its current financial obligations and its ability to cover them.

"There appears to be an acceptance that an Evergrande failure is more a matter of when and not if, and the real question is how any fallout is managed," commented an analyst at CMC Markets. "The picture on this remains uncertain after a vague statement this morning.”

Evergrande currently owes more than $300 billion to different financial institutions, and given its current financial situation, it's highly likely that it will default at some point. Now that it settled part of its financial obligations, mainly those concerning yuan-denominated bonds, the company is now due to pay the $83.5 million in interest on dollar-denominated bonds, and it's still not clear how the company will meet these financial obligations.

Many speculate that the Chinese government may bail out the real estate giant given how exposed the Chinese financial system is and because it is believed to be "too big to fail". But others, such as S&P, claim that the government would not provide direct support to it unless there is a far-reaching contagion that would cause multiple developers to fail, which according to their projections is a highly unlikely event.

S&P is not the only institution that has claimed that the effects of a possible default would be moderate. US Federal Reserve Chair Jerome Powell commented that this problem seems to be particular to the Asian country and that he doesn't see anything similar happening in the United States. The Bank of Japan also expressed that despite its close monitoring of the situation, there doesn't seem to be a risk for the Japanese economy.

The Chinese central government itself has shown its reluctance to bail out the company, though according to sources it has been asking the local government to prepare for the downfall of the company. More concretely, local governments have been instructed to only act if the company fails to manage the situation in an orderly manner.

Despite the risk of default, Evergrande group stock prices went up by 17.62% today, closing the session at the 2.67 level and breaking a seven-day losing streak. In the previous session, Evergrande shares lost 0.44%, closing at the 2.27 level. In weekly terms, it has so far gained 5.12%, breaking a five-day losing streak.

Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

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