China Evergrande said it will give priority to retail investors seeking to recover investments made with the indebted developer, as the Wall Street Journal reported that Beijing is asking local governments to prepare for its potential downfall.
Officials familiar with talks about the teetering developer said there are preparations underway ”for the possible storm,” the WSJ report said, adding that “local-level government agencies and state-owned enterprises have been instructed to step in to handle the aftermath only at the last minute should Evergrande fail to manage its affairs in an orderly manner.”
Local governments have been told to prevent unrest and mitigate the ripple effect on homebuyers and the economy by limiting job losses, it said.
Evergrand Chairman Hui Ka Yan’s reassurance that retail investors would be prioritised came after the developer said on Wednesday it had “resolved” a coupon payment on an onshore bond, pushing the company’s stock price to its biggest single-day percentage rise since its listing in 2009.
It was later revealed that financial regulators in Beijing issued a broad set of instructions to the embattled developer, telling Evergrande to focus on completing unfinished properties and to repay individual investors while avoiding a near-term default on its dollar bonds, Bloomberg Law reported.
Global investors have been on tenterhooks in recent weeks as debt payment obligations of Evergrande, labouring under a $305 billion mountain of debt, triggered fears its could pose systemic risks to China’s financial system.
The company faced $83.5 million in dollar-bond interest payments on Thursday on a $2 billion offshore bond – with more payments next week, when a $47.5 million dollar-bond interest payment is due.
Without mentioning the offshore debt, the chairman late on Wednesday urged his executives to ensure the quality delivery of properties and redemption of wealth management products held by millions of mainly retail investors.
There has been mounting political pressure on the company to act as homebuyers and retail investors grow increasingly angry at the prospect of losing the savings they bet on Evergrande properties and wealth management products.
“Assuming this situation goes the way of a debt restructuring … we think the retail investor nature of the wealth management products would be prioritised for social stability,” Ezien Hoo, credit analyst at OCBC Bank, said.
Foreign investors, who hold paper issued by offshore entities, might find it harder to get paid as they had “lower bargaining power versus other lenders closer to the assets,” he said.
The central bank, which boosted liquidity by 90 billion yuan ($14 billion) on Wednesday, injected a further 110 billion yuan through reverse repo operations into the banking system on Thursday to give the economy a further shot in the arm ahead of the National Day holiday, as the end of the quarter nears.
Evergrande shares surged as much as 32% on Thursday as trading resumed after a public holiday, though gains were soon pared and it ended at 17.6% up at the close of trading. Evergrande’s property services unit also clawed back some of its recent losses.
The sense of relief spread to mainland property stocks listed in Hong Kong, with Country Garden, China’s largest developer, up as much as 14% at one point and 7.15% at the close, while Sunac China rose by 9% and Guangzhou R&F Properties was also 7.48% higher on the day.
Oscar Choi, founder and CIO of investment firm Oscar and Partners Capital Ltd, said Evergrande was wary of enflaming social tensions by leaving homes unbuilt, construction workers unpaid and retail investors counting their losses.
Once those priorities had been met, Evergrande would talk to its other creditors, he said, adding: “Otherwise a few hundred thousand people will fight with the government.”
A company spokesperson did not immediately respond to request for comment on its payment obligation due on Thursday.
Evergrande, which epitomised the borrow-to-build business model and was once China’s top-selling developer, ran into trouble in recent months as Beijing tightened rules in its property sector to rein back too much debt and speculation.
Investors worry that the rot could spread to 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.
Fitch Ratings said on September 16 that it had cut its 2021 economic growth forecast for China to 8.1% from 8.4%, citing the impact of the slowdown in the country’s property sector on domestic demand.
Underscoring the scramble to avoid contagion risk, Chinese Estates Holdings, the No.2 shareholder of Evergrande, said on Thursday it had sold $32 million worth of its company stake and planned to exit the holding completely.
Some analysts say it could take weeks for investors to have any clarity about how the Evergrande situation will resolve.
“The company could restructure its debts but continue in operation, or it could liquidate,” wrote Paul Christopher, head of global market strategy at Wells Fargo Investment Institute. In either case, investors in the company’s financial instruments likely would suffer some losses, he wrote.
“In the event of a liquidation, however, Chinese and global investors could decide that the contagion could spread beyond China,” he added.
US Federal Reserve Chair Jerome Powell said on Wednesday that Evergrande’s problems seem particular to China and that he did not see a parallel with the US corporate sector.
• Jim Pollard and Reuters
This reported was updated on September 23.