Chinese markets were lower on Friday after offshore bonds of indebted developer Evergrande were lowered to default as regulators onshore sought to reassure investors that all consequences in the real estate sector would be contained.
Fitch rated Evergrande, the world ‘s most indebted developer, as a “limited default” on Thursday – the first rating agency to do so – after the company failed to respond to requests for information regarding overdue coupon payments worth $ 82.5 million. Kaisa, another heavily indebted programmer, has also been laid off.
The evaluation actions marked the most significant moment so far marathon liquidity crisis which has spread to other companies across the country’s vast real estate sector and has sparked global concerns about the potential impact on the Chinese economy.
The CSI 300 index in mainland China fell 0.6 percent this morning, largely in line with losses in the Asia-Pacific region and the U.S. as Omicron-induced sales lost momentum.
Shares of Evergrande fell as much as 3.9 percent on Friday morning, but broader real estate indices did not change much after Beijing’s efforts to calm anxiety by taking over the company’s restructuring.
On Thursday, National Bank of China Governor Yi Gang said Evergrande risks would not affect the normal functioning of the market in the short or long term and that investors’ rights would be respected, according to the Securities Times, a state-backed newspaper.
China’s central bank said on Monday it would release 1.2 billion Rmb ($ 188 billion) of liquidity for the banking system by reducing the share of deposits that financial institutions must hold in reserve by 50 basis points.
The Politburo of the Communist Party of China has also promised to maintain a proactive fiscal policy and a “flexible” monetary policy next year, state media reported.
The Hang Seng Mainland Properties Index, which tracks China’s largest developers, including Evergrande, remained unchanged at noon. That’s compared to a 0.5 percent drop for Hong Kong’s Hang Seng benchmark index and a drop of about 0.3 percent for Japan’s Topix.
“I think it’s a fair interpretation that markets have already set prices with a very high probability of default,” said Logan Wright, director of the Hong Kong-based consulting firm Rhodium Group. “The second is that the easing of measures and government policies has somewhat changed the market environment.”
Yields on Chinese troubled debt markets, which range inversely from bond prices, have fallen despite bad news from Evergrande.
Average yields on the Bloomberg index of high-yielding Chinese dollar bonds have fallen nearly 1 percentage point since last Friday, when Evergrande revealed it would struggle to meet its $ 260 million debt.
But Wright said that while the political response has been positive, sales in the real estate sector still need to stabilize and private loans to grow to bring about a proper recovery.
“Things that seemed unsustainable have become unsustainable,” Wright said, adding that the next question is “how far will this contagion spread.”