MNI:China May Prioritise Evergrande USD Debt, Retail Investors

Chinese authorities are likely to ensure Evergrande Group honours interest payments on dollar bonds in the near-term at least and to Chinese retail investors, policy advisors told MNI, with one saying that regulators could establish a working group to prioritise future debt payments necessary for financial and social stability.

Regulators are likely to ask banks to provide support if necessary to permit Evergrande's upcoming interest payments on dollar bonds in particular in order to safeguard China's reputation among international investors, said Yang Xiaoyi, a researcher at BRI Data, an investment advisory firm to local governments. But another advisor said it was possible the company could default on some yuan bonds and bank loans.

"Retail investors would receive special consideration in the interests of social stability, but institutional investors may have to bear some losses," said the advisor, asking to remain anonymous. "It is impossible for the government to take over this unprecedent and enormous debt, which is expected to reach around CNY 1.5 trillion."

The government is matching Evergrande with possible buyers, and could ask banks to extend maturities on some loans to the company, the advisor said. The People's Bank of China will in the meantime keep liquidity ample to soothe interbank markets, he added.

Defaults on some Evergrande bonds are inevitable, given the company's debts and poor liquidity, another advisor said. Regulators may establish a working group to focus on how best to resolve the debt risk, with representatives from major financial regulators such as the PBOC.

LOCAL GOVERNMENTS MAY TAKE ON ASSETS

An official at one local government financing vehicle said it had been instructed to prepare to take over some of the assets of Evergrande's local branch, adding that it was likely that other local governments elsewhere in the country would face similar requests. The official asked not to be named.

Local government financing vehicles may be assigned ongoing industrial park or commercial housing projects that can be quickly monetised, said Yang.

"Local governments are very aware that unfinished building and delayed delivery of housing could spark social unrest," said Yang.

But, while local governments could take on Evergrande assets, this would not be part of a comprehensive restructuring, said Yan Yuejin, director of E-house China Research and Development Institution. Ming Ming, deputy research head of CITIC Securities and a former staffer at the PBOC, noted that local funding vehicles may lack both real estate experience and the funds to buy Evergrande assets, and so may have to assume trusteeship instead.

The government still expects Evergrande to overcome the liquidity crunch by itself if possible, said Gu Yunchang, former deputy director of the Housing Policy Expert Committee with the Ministry of Housing and Urban-Rural Development. Local governments have limited financial capacity, particularly at a time of economic slowdown, and Evergrande is not the only developer struggling as tighter regulations are imposed on the housing sector, Gu said.

Amid heightened market concerns, the group's main property unit offered some relief to investors by promising to make a bond interest payment on time on Thursday. The company also faces an interest payment on a 9.5% September 2024 bond due next Wednesday.