Evergrande
An update to an earlier post on the Evergrande story.
Comparatively little has changed, at least, little that was unexpected. Several additional developers have fallen behind on bond payments, moving into the grace period (typically 30 days) before entering actual default.
Fantasia (one of the potential defaulters) had declared “no liquidity issues” only a fortnight prior to the distribution. So things continue to be bad for developers, and we’d suggest will continue to remain poor for some time to come.
Property dominates the high yield proportion of China’s listed debt markets, and as such we see material losses on the iBoxx China USD denominated sleeve of the broader Asia ex Japan index.
However, contagion to other sectors across China’s debt markets, or to the emerging markets more broadly, is very modest. Spreads are higher than pre-COVID, but equally, a lot has been happening.
Rather than a systemic issue, we see China’s Evergrande mess as a harbinger for change within the composition of GDP (less investment as a share of GDP) and a rebalancing to a larger household share.
That’s not a great backdrop for China’s equity market, and especially not a great backdrop for Australian commodity producers, who essentially supply the raw materials that keep China’s fixed asset investment at such a high proportion of GDP.
But in terms of global equity market risk, the energy crisis and the US default-brinksmanship are larger, more important issues.
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