Asian equities hit by volatility on Evergrande default fears

Evergrande Real Estate Group Ltd updates

Shares in Asia swung between gains and losses in the wake of Wall Street’s worst one-day fall in four months, as investors braced for the possibility of a default by Chinese property developer Evergrande.

Shares in Japan sold off sharply on Tuesday after a public holiday on Monday, with the benchmark Topix dropping 1.5 per cent on fears of contagion from the developer’s liquidity crisis. Hong Kong’s Hang Seng reversed early gains to be 0.3 per cent lower, having finished the previous session down more than 3 per cent.

Evergrande, the world’s most indebted property developer, fell as much as 7 per cent, after closing more than 10 per cent lower on Monday. The company’s share price has dropped about 85 per cent this year.

The turmoil at Evergrande has shaken markets this week, as global investors grappled with the prospect that Beijing could allow the leverage-fuelled group to default. Such a move would upend long-held expectations that Chinese authorities would intervene to protect systemically important but financially distressed companies.

The ruptures sparked a global equities sell-off on Monday, pummelling shares in Europe and driving down all but 50 stocks on the S&P 500, which finished the day 1.7 per cent lower. The Nasdaq Golden Dragon index of large US-listed Chinese companies closed down 5.4 per cent.

Pressure on property developers that were responsible for much of China’s economic growth — along with most of Asia’s high-yield dollar debt issuance — has also mounted ahead of a crucial deadline for Evergrande on Thursday, when it faces an $83.5m interest payment on one of its bonds.

The Securities Times, a financial newspaper controlled by Chinese Communist party mouthpiece People’s Daily, reported on Tuesday that Evergrande chair Hui Ka Yan had written in a letter to employees that he was confident the company “will step out of its darkest period as quickly as possible”.

But analysts said Chinese authorities were unlikely to provide the teetering developer with direct support, despite growing anticipation of a default this week.

“Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy,” analysts at S&P said in a recent note. “Evergrande failing alone would unlikely result in such a scenario.”

Judy Zhang, an analyst at Citi, warned that while Beijing would probably be able to mitigate the spillover from the developer’s debt crisis, more than 40 per cent of Chinese banks’ assets were related to the property sector.

“We do not see the Evergrande crisis as China’s ‘Lehman moment’ given policymakers will likely uphold the bottom line of preventing systematic risk to buy time for resolving the debt risk,” Zhang said, referring to the market turmoil that followed the collapse of Lehman Brothers in 2008.

But she added that credit risk from exposure to debt-laden Chinese developers was the highest for lenders including Minsheng Bank, Everbright Bank and Ping An Bank, a subsidiary of insurance group Ping An, whose 3 per cent fall on Tuesday left its shares down almost 9 per cent this week.

Hong Kong-listed Minsheng and Everbright are both down more than 5 per cent this week.

The spectre of a China-driven crunch also triggered concerns that any prolonged uncertainty could lead the Bank of Japan to buy exchange traded funds for the first time since June to support the market.

Despite the savaging of sectors such as industrials that were perceived to be vulnerable to a Chinese property crisis, dealers said Japan was trading as more of a haven.

A leadership race to determine the next prime minister and the possibility of a huge stimulus package was providing solid support to the Tokyo market, said Takeo Kamai, CLSA’s head of execution. A protracted rout of Chinese equities could also convince global funds to rotate investments into Japan, he added.

Markets in China remained closed for a national holiday on Tuesday but in Singapore, FTSE China A50 futures, which are used to hedge exposure to stocks listed in Shanghai and Shenzhen, were flat after finishing Monday’s session 3 per cent lower.

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