Another big default in China
As we expected, Evergrande is only the first cockroach.
With the world waiting to find out the fate of a $260 million bond issued by Jumbo Fortune Enterprises which is guaranteed by Evergrande, and which has no grace period so an event of default could take place as soon as this week (the bond has five business days to make payment subject to administrative and technical error), overnight, stocks and bonds of China’s heavily leveraged property tumbled after a failure by smaller developer Fantasia Holdings Group to repay notes deepened investor concerns about the sector’s outlook.The non-payment forced S&P to downgrade Fantasia (1777.HK) to selective default earlier this morning.
As Bloomberg points out, "Chinese junk dollar bonds were poised for their biggest selloff in at least eight years amid renewed concern that authorities will do little to alleviate the credit crisis gripping the industry." Yields are near a decade high, and with Evergrande stock still halted, investors took out their wrath on peer developers who still trade and whose shares tumbled, with Sunac China Holdings and China Aoyuan Group falling at least 10%. Meanwhile, as noted on Sunday, Evergrande’s silence on a reported stake sale in a unit left its shares suspended.
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Looking ahead it only gets worse: fifteen of the country’s most stressed property developers will have $2.1 billion in bond payments due this month, according to calculations by Citi, comprised mostly of coupons. If they somehow manage to avoid mass defaults, it only gets tougher in January when the bill is set to double as principal payments come due, indicating market stress may reach another maximum around that time.
Finally, the worst news is that the market contagion is starting to spread rapidly to the broader property market: overnight China reported that Shenzhen second-hand home sales crashed 80% y/y to just 1,765 units in September, the first sub-2,000 print in 12 years. Should Beijing fail to arrest this crash in the real-estate market, then all bets are off.
These are just some outward signals of stress on the Chinese economy. The inability to keep the lights on is another signal that things are not going well in China. I suspect that all of these things are adding to the supply chain problems of getting good to the US and elsewhere. At this point, reliance on China looks like a big mistake.
See, also:
Reduced silicon output in China is leading to increased chip production costs
Surging prices for high-purity silicon is sending a shockwave towards chipmakers
And:
Empty Buildings in China’s Provincial Cities Testify to Evergrande Debacle
The property giant borrowed heavily to develop in out-of-the way places like Lu’an
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