2021: A Year Defined by Soaring Inflation, Covid Variants & Market Resilience

After an extremely chaotic 2020, the world pinned hopes on stability and normality returning this year.

Indeed, 2021 kicked off on a positive note as the mass vaccinations against Covid-19 and confirmation of Joe Biden’s victory in the presidential election boosted investor confidence.

Renewed stimulus hopes from Biden’s $1.9 trillion economic rescue plan fuelled the risk-on mood, propelling US stocks to record highs during the first month of 2021. Console retailer GameStop also hijacked the headlines by surging over 1600% in January as a group of investors on Reddit fuelled a short squeeze in the company’s shares.

In February, a sense of caution enveloped global markets as investors mulled over the possibility of rising inflation becoming a major theme. Signs of inflation were already spotted across the globe amid supply-chain disruptions, while prices pressures were expected to return amid an economic boom powered by vaccines and pent-up consumer demand. Taking a look at commodities, gold tumbled to an 8-month low under $1720 thanks to rising yields, dollar strength, and growing global risk appetite.

Things started getting sticky in March as coronavirus variants appeared across the globe. In the United Kingdom, the B.1.1.7 strain was initially considered more lethal than earlier variants. Different variants of the novel coronavirus were also reported in Brazil and even India which saw a spike in cases despite vaccine rollouts. On the currency front, the dollar appreciated against almost every single G10 currency as investors speculated that the massive fiscal stimulus and aggressive vaccinations would help the US economy recover.

Q2 kicked off on a positive note despite global economic uncertainty caused by the ongoing pandemic. Equity bulls remained in the driving seat amid robust Q1 earnings, the Fed’s pledge to keep rates lower for longer, and China’s eye-popping 18.3% growth in the first quarter.

In other news, Coinbase made its debut on Nasdaq on April 14th which was seen as a watershed moment for the cryptocurrency industry.

Everyone was talking about copper in May as the commodity surged to a record high of $4.9. The rally was triggered by the reopening of major economies and the robust demand for minerals needed for the green energy agenda. Given how copper is used in everything from electric vehicles to home appliances like washing machines, the outlook was heavily bullish – especially amid the bigger global focus on green energy. The commodities boom, fuelled by rising global demand and supply shortages fuelled fears around inflation across the globe.

In the United Kingdom, the Delta variant of Covid-19 clouded economic recovery hopes in June. As the third wave of Covid-19 cast doubt on more lockdown easing before July, the British Pound tumbled against every single G10 currency, sinking as low as 1.3790 against the dollar.

It was not only the UK affected by the Delta variant, it swept across Europe and started gaining ground in the United States. Hotspots were also found in Asia and Africa.

A sense of unease gripped markets in July as Covid-19 cases across the globe surged. The International Monetary Fund (IMF) warned that unequal access to Covid vaccines risked derailing the global recovery. Global stocks displayed resilience despite the Delta variant fuelling the surge in coronavirus cases worldwide. Infact, the S&P500 concluded the month of July almost 2% higher despite the growing uncertainty. Down under, the Australian dollar collapsed like a house of cards due to a surge in virus infections and lockdown restrictions in Australia.

Hong Kong stocks stole the spotlight in August as the tech-heavy Hang-Seng Index briefly tumbled into bear market territory, dropping more than 20% from its mid-February peak. The descent was driven by China’s regulatory crackdown on sectors ranging from financial technology to education and gaming.

Risk-off was the name of the game during the final month of Q3 thanks to inflation fears, growth concerns, and mounting uncertainty over Covid-19. As inflation made itself at home in the United States, Federal Reserve policymakers were forced to accept that inflation proved to be larger and more long-lasting than expected. The terrible combination of growth doubts, turmoil surrounding China’s Evergrande and Fed taper fears saw the S&P500 fall 4.8% in September.

Oil prices exploded higher in October, with WTI rising beyond $80 for the first time since 2014 as surging natural gas prices spurred greater demand for crude ahead of winter.

Tight global supply and robust fuel demand in the United States and beyond energized oil bulls. WTI concluded the first month of Q4 roughly 10% higher while Brent was not too far behind gaining 6%. Interestingly, the IMF and World Bank both issued warnings over rising inflation.

After “talking about talking about” tapering for many months, the Federal Reserve finally made a move in November.

This marked a crucial turning point as it stepped away from its emergency policy. In a process known as tapering, the Fed was set to reduce $120 billion in monthly purchases of Treasuries and mortgage-backed securities. The mighty dollar appreciated across the board, boosted by increased expectations for a reduction in the Fed’s asset purchase and interest rate hike, possibly in late 2022. During this month, the World Health Organization (WHO) also declared a new coronavirus variant to be “of concern” and named it Omicron. It was first reported to the WHO from South Africa on 24 November.

Growing uncertainty over the Omicron variant weighed heavily on market sentiment in December. With the new variant in town spreading faster than the more prevalent Delta, this clouded the global growth outlook as countries across the globe announced tighter restrictions.

The end of 2021 saw major central banks turning hawkish in the face of rising inflation.

As one of the largest central banks in the world embarked on the path to policy normalization, other banks wasted no time to tighten. We saw the Reserve Bank of New Zealand (RBNZ) raise interest rates in November, the Fed doubling down on its stimulus taper in December, and the Bank of England (BoE) also surprising markets by hiking rates. Indeed, with US inflation skyrocketing 6.8% in the year through November and consumer prices soaring across the globe, this offers a taster of what to expect in 2022.

One key thing to keep in mind is that the S&P500 closed at record highs 69 times this year despite the global growth fears and covid related uncertainty.

US equity bulls were certainly in the driving seat throughout 2021 with the S&P500 up over 27% year-to-date, marking its third straight annual increase.

There is no doubt that 2021 was a historic year defined by runaway inflation, coronavirus variants, and resilient stock markets.

With persistent inflation likely to remain a major theme in 2022, it will be interesting to see whether this forces more central banks to tighten monetary policy. Let’s not forget about the current Omicron menace and risks of new variants potentially clouding the global economic outlook. Equity bulls dominated the scene this year but will we see the same in 2022? Or will the combination of rising inflation and tighter monetary policy end the bull run?

We saw some extreme events throughout 2021 with the show set to continue in 2022. It may be wise to fasten your seatbelts in preparation for another eventful and potentially volatile year for financial markets as 2021 slowly comes to an end.

By Lukman Otunuga Senior Research Analyst

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Will Evergrande Make Gold Grand?

Beijing, we have a problem! Evergrande, one of China’s largest real estate developers and biggest companies in the world, is struggling to meet the interest payments on its debts. As the company has more than $300 billion worth of liabilities, its recent liquidity problems have sparked fears in the financial markets. They also triggered a wave of questions: will Evergrande become a Chinese Lehman Brothers? Is the Chinese economy going to collapse or stagnate? Will Evergrande make gold grand?

The answer to the first question is: no, the possible default of Evergrande likely won’t cause a global contagion in the same way as Lehman Brothers did. Why? First of all, Lehman Brothers collapsed because of the run in the repo market and the following liquidity crisis. As the company was exposed to subprime assets, investors lost confidence and the bank lost its access to cheap credit. Lehman Brothers tried to sell its assets, which plunged the prices of a wide range of financial assets, putting other institutions into trouble.

Unlike Lehman Brothers, Evergrande is not an investment bank but a real estate developer. It doesn’t have so many financial assets, and it’s not a key player in the repo market. The exposure of important global financial institutions to Evergrande is much smaller. What’s more, we haven’t seen a credit freeze yet, nor an endless wave of selling across almost all asset classes, which took place during the global financial crisis of 2007-2009.

Given that the Lehman Brothers’ bankruptcy was ultimately positive for gold (although the price of the yellow metal declined initially during the phase of wide sell-offs), the fact that Evergrande probably doesn’t pose similar risks to the global economy could be disappointing for gold bulls.

However, gold bulls could warmly welcome my answer to the second question: the case of Evergrande reveals deep and structural problems of China’s economy, namely its heavy reliance on debt and the real estate sector. As the chart below shows, the debt of the private non-financial sector has increased from about 145% of GDP after the Great Recession to 220% in the first quarter of 2021.

Chart, line chartDescription automatically generated

So, China has experienced a massive increase in debt since the global financial crisis, reaching levels much higher than in the case of other economies. The rise in indebtedness allowed China to continue its economic expansion, but questions arose about the quality and sustainability of that growth. As Daniel Lacalle points out,

The problem with Evergrande is that it is not an anecdote, but a symptom of a model based on leveraged growth and seeking to inflate GDP at any cost with ghost cities, unused infrastructure, and wild construction.

Indeed, the levels and rates of growth of China’s private debt are similar to the countries that have experienced spectacular financial crises, such as Japan, Thailand, or Spain. But the significance of China’s real estate sector is much higher. According to the paper by Rogoff and Yang, the real-estate sector accounts for nearly 30% of China’s GDP.

On the other hand, China has a relatively high savings rate, while debt is mostly of domestic nature. China’s financial ties to the world are not very strong, which limits the contagion risks. What is more, the Chinese government has acknowledged the problem of excessive debts in the private sector and started a few years ago making some efforts to curb it. The problems of Evergrande can be actually seen as the results of these deleveraging attempts.

Therefore, I’m not sure whether China’s economy will collapse anytime soon, but its pace of growth is likely to slow down further. The growth model based on debt and investments (mainly in real estate) has clearly reached its limit. In other words, the property boom must end.

Rogoff and Yang estimate that “a 20% fall in real estate activity could lead to a 5-10% fall in GDP”. Such growth slowdown and inevitable adjustments in China’s economy will have significant repercussions on the global economy, as – according to some research – China’s construction sector is now the most important sector for the global economy in terms of its impact on global GDP.

In particular, the prices of commodities used in the construction sector may decline and the countries that export to China may suffer. Given that China was the engine of global growth for years, it will also slow down, and, with lower production, it’s possible that inflation will be higher.

Finally, what do the problems of China’s real estate sector imply for the gold market? Well, in the short term, not so much. Gold is likely to remain under downward pressure resulting from the prospects of the Fed’s tightening cycle.

However, if Evergrande’s problems spill over, affecting China’s economy or (a bit later) even the global economy, the situation may change. Other Chinese developers (such as Fantasia or Sinic) also have problems with debt payments, as investors are not willing to finance new issues of bonds.

In such a scenario, the demand for gold as a safe-haven asset might increase, although investors have to remember that the initial rush could be into cash (the US dollar) rather than gold. Unless China’s problems pose a serious threat to the American economy, the appreciation of the greenback will likely counterweigh the gains from safe-haven inflows into gold. So far, financial markets have remained relatively undisturbed by the Evergrande case. Nevertheless, I will closely monitor any upcoming developments in China’s economy and their possible effects on the gold market.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

China Property Firms’ Shares, Bonds Hit as Yango Seeks New Extension

Fujian province-based Yango Group Co. Ltd. has been in talks with investors to discuss the extension of payments on yuan-denominated asset-backed securities that holders can redeem this month, three sources familiar with the matter told Reuters.

The company plans to repay interest in full, with unpaid principal rolled over for a year, they said. Reuters was unable to confirm whether the company would make principal payments on the securities this month.

Yango Group did not immediately respond to Reuters’ requests for comment.

On Monday, Yango offered to exchange some U.S. dollar bonds for new notes personally guaranteed by its chairman to avoid defaulting on upcoming debt payments.

Fitch Ratings said Tuesday that it considered that offer a distressed debt exchange, downgrading Yango’s rating to “C” from “B-“. Moody’s Investors Service earlier cut Yango’s corporate family rating to Caa2 from B2, citing liquidity risk.

“Yango may not be able to mobilise all of its cash holdings to repay its maturing debts, given that most of it resides in its project companies. In addition, Yango’s exposure to its joint ventures is significant, which could limit its ability to control its cash flow,” Moody’s said in a statement.

China Chengxin International, a domestic agency, said it had placed the company on a watchlist for possible downgrades, while Dagong Global Credit Rating Co on Monday cut its outlook on Yango to negative due to uncertainty over funds for debt repayments.

The downgrades and warnings weighed on market sentiment on Tuesday, pushing Hong Kong’s mainland properties sub-index down more than 4% at one point, taking its losses since an Oct. 22 peak – when China Evergrande Group narrowly avoided a $19 billion default – to nearly 17%.

The CSI300 real estate index of A-shares fell 2.4%, while Yango’s own shares fell as much as 9%.

Yango Group’s bonds fell sharply for a second day, with Duration Finance quoting its 12% March 2024 bond down almost 58% on the day to less than 13 cents, yielding nearly 160%. Its Shenzhen-traded April 2024 bond fell more than 20%, triggering a trading halt.

November 2022 and 2023 bonds issued by Evergrande unit Scenery Journey fell more than 12% to about 20% of their face value ahead of coupon payments totalling $82.5 million this weekend.

Bonds issued by developers Yuzhou Group Holdings Co, Ronshine China Holdings and Zhenro Properties Group also fell more than 10%.

Clarence Tam, fixed income portfolio manager at Avenue Asset Management in Hong Kong, said the Yango exchange offer had aggravated gloomy sentiment. Falling market value forced some leveraged products to unwind positions, weighing prices down further, he said.

“Quality BB and split names … suffer the most these two days,” said Tam.

Evergrande narrowly avoided a catastrophic default for the second time in a week on Friday, making a last-minute payment on an overdue dollar bond coupon. On Tuesday its shares gave up early gains to fall 2.5%.

Evergrande’s woes have brought collateral damage to China’s property sector, with some Chinese developers forced into formal default on their dollar bonds last month and others proposing extended payment schedules.

(Reporting by Andrew Galbraith in Shanghai and Xiao Han in Beijing; additional reporting by Steven Bian in Shanghai; Editing by Stephen Coates and Nick Macfie)

China Developer Yango Offers Bond Swap, Backstopped by its Chief, to Avert Default

Yango’s liquidity crunch comes against the backdrop of a crisis at China Evergrande Group, which has stoked concern among investors globally about the country’s deeply indebted, $5 trillion property sector and tightened funding access for other developers.

Yango is offering $25 in cash and $1,000 in new notes for each $1,000 of existing bonds exchanged, it said in a Hong Kong bourse filing. The exchange offer applies to its U.S. dollar notes due in February 2023, January 2022 and March 2022, which have an outstanding face value of $747 million.

The new bonds are personally guaranteed by Lin Tengjiao, Yango’s founder and chairman, the filing said. The Hurun Global Real Estate Rich List of March 2020 had estimated Lin’s personal fortune at $2.4 billion.

Yango said it is also seeking the support of investors to change the terms of its five other outstanding dollar bonds.

It said the offer was part of “overall efforts to improve our liquidity, preserve options to stabilize our operations as a going concern, and avoid imminent payment defaults and potential holistic restructurings of our debts and business operations.”

Government policy tightening, credit events and deteriorating consumer sentiment had cut off refinancing avenues for property firms “and put enormous pressure on our short-term liquidity, Yango said.

SHARES, BONDS SLUMP

The announcement follows a report from financial information provider Redd on Friday that Yango had asked holders of its asset-backed securities (ABS) to refrain from asking for repayment for a year over concerns it would struggle to pay this month.

Yango’s shares in Shenzhen plunged 7.5% on Monday and are down by nearly a quarter over the past week. The CSI300 real-estate sub-index slipped 1.6% on Monday against a 0.4% drop in the blue-chip index.

In the onshore bond market, the Shenzhen Stock Exchange halted trading of Yango’s April and August 2024 yuan bonds after they fell more than 30% on the day.

“The ABS are maturing on Nov. 8, so it’s a bit dangerous. The onshore market is anxious,” said a Beijing-based portfolio manager who asked not to be named, as he was not authorised to speak with media.

In international debt markets, Yango’s 7.5% February 2025 dollar bond fell more than 20% to a discount of about 85% of its face value, according to Duration Finance. Other Chinese developers’ bonds also slumped, weighing on an Asian high-yield bond ETF, which fell more than 1%.

Yango has eight outstanding U.S. dollar bonds worth a total $2.24 billion and 14 outstanding yuan-denominated bonds worth 13.1 billion yuan, according to Refinitiv data. Holders of the February 2023 notes, worth a total of $247 million, have the option to demand early repayment on Nov. 12.

Evergrande narrowly avoided a catastrophic default for the second time in a week on Friday, making a last-minute payment on an overdue dollar bond coupon just before its grace period expired.

Its woes have brought collateral damage, with some other Chinese developers forced into formal default on their dollar bonds last month.

But one developer, Xinyuan Real Estate Co, avoided a default on a maturing dollar bond in October by reaching an agreement with bondholders to exchange maturing notes for new bonds and cash.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Andrew Galbraith; Editing by Muralikumar Anantharaman)

China’s Yango Group Seeks Debt Forbearance Over Repayment Concerns -Redd

Yango’s 1.27 billion yuan ($198 million) 6.5% asset-backed securities mature in November 2022 but give holders the option to demand repayment next month.

In a report late on Friday, Redd cited four unnamed sources as saying the company had made the request to investors on Friday, at a closed-door meeting in Shanghai attended by senior executives.

Yango has no plans to provide credit enhancements to encourage holders to approve the extension, and executives indicated the company “could have trouble paying” if investors declined to extend the put date, the report said. No bondholders had approved the plan by the end of the meeting, Redd reported.

The request comes as a debt crisis at China Evergrande Group has raised concerns among investors globally about the country’s deeply indebted, $5 trillion property sector, tightening funding access for other developers.

Evergrande narrowly avoided a catastrophic default for the second time in a week on Friday, making a last-minute payment on an overdue dollar bond coupon just before its grace period expired.

In addition to its asset-backed securities, Yango has eight outstanding U.S. dollar bonds worth a total $2.24 billion and 14 outstanding yuan-denominated bonds worth 13.1 billion yuan, according to Refinitiv data.

For a look at all of today’s economic events, check out our economic calendar.

($1 = 6.4050 Chinese yuan)

(Reporting by Andrew Galbraith; Editing by William Mallard)

China Evergrande Shares Fall on Persistent Pressure From Debt Travails

Evergrande and China Evergrande New Energy Vehicle Group Ltd both fell less than 1%. The Hang Seng Index slumped 1.7%.

China Evergrande Group is reeling under more than $300 billion in liabilities, fuelling worries about the impact of its fate on global markets.

Late on Tuesday, China’s National Development and Reform Commission said that it and the State Administration for Foreign Exchange had met with foreign debt issuers, advising them to use funds for approved purposes and “jointly maintain their own reputations and the overall order of the market”.

Evergrande said on Tuesday it has resumed work on some projects in the Pearl River Delta region and it would deliver 31 real estate projects by the end of 2021. That number will rise to 40 by the end of June 2022.

Many of Evergrande’s construction projects across the country have been suspended as it was unable to pay contractors. The developer has some 1,300 real estate projects across China.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting By Anne Marie Roantree and Clare Jim; Editing by Himani Sarkar & Shri Navaratnam)

Chinese Developer Modern Land Defaults; Property Shares Drop

China’s state planner is set to meet with property firms carrying large dollar-denominated debts later in the day to take stock of their total issuance volume and repayment capability, amid the mounting concerns about liquidity.

Modern Land (China) Co Ltd said in a filing on Tuesday that it had not repaid principal and interest on its 12.85% senior notes that matured Monday due to “unexpected liquidity issues”.

Developers are defaulting “one by one”, said an investor with exposure to Chinese high-yield debt, who asked not to be named as he was not authorised to speak with media.

“The question is always, who’s next?”

Earlier this month, Fantasia Holdings Group defaulted on a maturing dollar bond that heightened concerns in international debt markets, already roiled by worries over whether Evergrande would meet its obligations.

Evergrande, which narrowly averted a costly default last week, is reeling under more than $300 million in liabilities and has a major payment deadline on Friday.

Shares of property developers extended losses, hurt also by concerns over China’s plans to introduce a real estate tax.

China’s CSI 300 Real Estate Index fell 2.7%, and the Hang Seng Mainland Properties Index dropped nearly 5.1%. The broader Hang Seng index edged down 0.6% while China’s CSI300 index slipped 0.3%.

The prospect of contagion and more defaults have weighed on the sector in a major setback for investors.

Chinese Estates Holdings Ltd said it would book a loss of HK$288.37 million ($2.24 billion) in the current fiscal year from its latest sale of bonds issued by Chinese property developer Kaisa Group Holdings Ltd.

Modern Land’s 11.8% February 2022 bond was down 1.6% at a discount of over 80% from its face value, yielding about 1,183%, according to data provider Duration Finance.

China Evergrande shares fell as much as 7.1%. Shares in its electric vehicle (EV) unit fell 5.5% after earlier rising as much as 5.8% as the developer said it would prioritise the growth of its EV business.

For a look at all of today’s economic events, check out our economic calendar.

($1 = 0.1287 Hong Kong dollars)

(Reporting By Donny Kwok in Hong Kong and Andrew Galbraith in Shanghai; Writing by Anne Marie Roantree; Editing by Himani Sarkar)

Take Five: ECB, FAANGs and China’s Bond Conundrum

In China, an imminent default of China Evergrande Group might be off the cards for now, but the property developer’s troubles seem far from over.

Markets in Britain are bracing for new budget forecasts, while bitcoin is back for a rollercoaster ride.

1/FOLLOW THE HERD?

Not for the first time – and likely not the last – the ECB has a delicate balancing act on its hands.

At its meeting on Thursday, it will face pressure to acknowledge that inflation is proving stickier than anticipated. The U.S. Fed will likely start tapering within weeks, Bank of England comments suggest a UK rate hike is coming soon and the likes of Norway, New Zealand have already tightened.

Will the ECB follow?

It has good reasons, such as subdued wages, to stick with its message that long-term price pressures remain weak and surging energy prices could hurt consumer spending and growth. But markets don’t square with the ECB’s policy guidance, and are pricing a strong chance of a rate hike by end-2022.

– ECB’s Lane says rates curve doesn’t square with guidance –

2/ FAANG GANG

Tech stocks and high global yields aren’t always a happy mix and investors will have something to chew over as four out of the five FAANG stocks – Facebook, Amazon, Apple and Google parent company Alphabet – are expected to report earnings.

FAANG’s breakneck growth and outsize weighting in the S&P 500 has helped drive markets higher for more than a decade. Barring Amazon, each is expected to report September quarter earnings-per-share set to beat last year’s numbers, according to I/B/E/S data from Refinitiv.

Strong quarterly numbers could help technology and growth stocks broaden the lead they have established over value-focussed peers in this year’s tug of war as markets find themselves caught between a powerful economic rebound and soaring commodity prices on one side, and rising Treasury yields and inflation on the other.

UPDATE 5-Global ‘Squid Game’ mania lifts Netflix quarter

3/ EVERGRANDE ENCORE

It seemed almost curtains down for China Evergrande Group, the embattled property giant, whose debt woes have rippled through global financial markets.

Evergrande supplied funds to pay interest on a U.S. dollar bond days before a deadline that would have seen it plunge into formal default. But that’s just the first payment deadline of many due in the coming months and years, with little doubt the group will have to overhaul its debt eventually and other companies are also under pressure.

Meanwhile, an announcement by the property developer that it would prioritise growth of its nascent electric vehicles business over its troubled core real estate operations has helped lift shares in Evergrande and its EV unit on Monday.

The group also said it resumed work on more than 10 property projects.

Evergrande’s debt drama will remain closely watched as a guide for how Beijing will deal with other major firms in financial trouble. Its problems have also led to a major reassessment of the premium investors demand for holding riskier Asian credits.

Some Evergrande bondholders received coupon payment for Sept 23 tranche -sources

UPDATE 2-Evergrande, EV unit shares jump after chairman signals business shift

4/ RISHI’S RED BOX

UK Chancellor Rishi Sunak will on Wednesday deliver his latest budget forecasts. They are expected to show borrowing in the 2021/22 financial year is on track to come in around 40 billion pounds ($55 billion) below March predictions, thanks to faster economic growth.

But Sunak – who has adopted a more hawkish fiscal stance than many of peers is facing a pretty bleak backdrop. The combination of higher inflation and lower growth coupled with labour market shortages and supply chain disruptions due to Brexit and COVID-19 is making investors and policy makers uneasy.

Meanwhile the pound has failed to capitalise on rising bets of an impending Bank of England rate hike as some investors believe that policymakers may be making a mistake by tightening policy too quickly, making the British currency more volatile than its major rivals in recent days.

UPDATE 2-UK borrowing down by half as Sunak readies budget

5/BITCOIN ROLLERCOASTER

Bitcoin’s rollercoaster year has stepped up a gear. The biggest cryptocurrency hit an all-time high of $67,016 on Wednesday, fuelled by bets the first U.S. bitcoin futures exchange traded fund would pave the way for money to pour into digital assets.

Bitcoin’s latest peak came six months after its last, its journey in-between peppered by wild price swings dominated by a cryptocurrency crackdown in China.

Crypto analysts reckon the dawn of U.S. ETFs – a dozen others are in the pipeline – will support prices. Others say the view bitcoin as a hedge against inflation is a bigger factor. Whoever’s right, one thing is clear: bitcoin volatility isn’t going anywhere.

UPDATE 2-Bitcoin notches record high, day after U.S. ETF debut.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Vidya Ranganathan in Singapore, Dhara Ranasinghe, Karin Strohecker and Tom Wilson in London, Saqib Ahmed in New York; Editing by Louise Heavens and Alexander Smith)

China’s Debt-Ridden Evergrande Resumes Work On More Than 10 Property Projects

Evergrande, deep in crisis with more than $300 billion in liabilities, has not disclosed how many of its 1,300 real estate projects across China it has had to halt work on.

The company said on Aug. 31 that some projects were suspended because of delays in payment to suppliers and contractors and it was negotiating to resume building.

On Sunday, it said in a post on its Wechat account that some of the projects it had resumed work on had entered the interior decoration stage while other buildings had recently finished construction.

Evergrande added that its efforts to guarantee construction would shore up market confidence and included several photos of construction workers on different projects, stamped with the time and date.

China’s second-largest property developer last month also promised potential buyers it will complete building of their homes and said that work on one of the world’s biggest soccer stadiums in the southern city of Guangzhou was proceeding as planned.

Last week’s move to pay $83.5 million in interest on a U.S. dollar bond has bought Evergrande another week to wrestle with a debt crisis looming over the world’s second-biggest economy.

Highlighting the stresses on its core business, Evergrande also announced on Friday plans to give future priority to its electric vehicles business over real estate.

Evergrande’s woes have reverberated across the $5 trillion Chinese property sector, which accounts for a quarter of the economy by some metrics, with a string of default announcements, rating downgrades and slumping corporate bonds.

Its debt crisis is also being widely watched by global financial markets concerned about broader contagion.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Dominique Patton; Editing by Edwina Gibbs)

Marketmind: Inflation Expectations Are Soaring

A look at the day ahead from Tommy Wilkes.

In the U.S. breakeven rates rose to their highest since 2012, while in Britain a record proportion — 48% — of the British public thinks inflation will accelerate over the next 12 months, according to data, amid ongoing energy price spikes and disruption in the supply chain.

But if the potential for self-fulfilling price rises is troubling the world’s central banks as they look for ways to tame inflation without choking off economic growth, financial markets appear to be taking it all in their stride.

The S&P clocked up a new record close on Thursday, while Asian stocks — given a boost by indebted developer Evergrande making a surprise interest payment — rallied on Friday.

World stocks are now up 4.6% in October and just 1% off record highs as investors shrug off the spectre of higher inflation and tighter monetary policy and instead cheer another round of forecast-busting corporate earnings.

On Friday, European stocks looked mix at the open and Wall Street futures traded slightly below their record high.

Flash purchasing managers index survey data for October for the euro zone, Britain and the United States and due later will be watched closely by investors as a gauge of economic health.

Oil prices dipped while 10-year U.S. Treasury yields flirted with 1.7%, the highest levels since May.

In company specific news, French carmaker Renault said its production losses in 2021 because of a global semiconductor chip shortage would be far larger than previously forecast but maintained its profit outlook. Drinks maker Remy Cointreau forecasted an “exceptional” current operating profit growth in the first half of its 2021/2022 fiscal year.

Key developments that should provide more direction to markets on Friday:

-Japan CPI

-Flash PMIs everywhere

-UK GfK consumer confidence/UK retail sales

-Fed speakers:Fed chair Jerome Powell,  San Francisco President Mary Daly

-Emerging markets: Russia central bank meets

-European earnings: Pernod Ricard,

-U.S. earnings: American express, Schlumberger, Honeywell

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Tommy Wilkes; Editing by)

Explainer-How China Evergrande’s Debt Troubles Pose a Systemic Risk

News of the remittance will likely bring relief to investors and regulators worried about a default’s wider fallout in global markets, adding to reassurance from Chinese officials who have said creditors’ interests would be protected.

WHAT IS EVERGRANDE?

Chairman Hui Ka Yan founded Evergrande in Guangzhou in 1996. It is China’s second-largest property developer, with $110 billion in sales last year, $355 billion in assets and more than 1,300 developments nationwide. It listed in Hong Kong in 2009.

Evergrande grew rapidly through a loan-supported land-buying spree and selling apartments quickly at low margins. It employed 163,119 staff as of June-end, its interim report showed.

Slowing growth has seen it branch into businesses such as insurance, bottled water, soccer and electric vehicles (EVs).

HOW DID CONCERNS ARISE OVER DEBT?

In September last year, a leaked letter showed Evergrande pleading for government support to approve a now-dropped backdoor stock market listing. Sources told Reuters the letter was authentic; Evergrande called it fake.

In June, Evergrande said it did not pay some commercial paper on time, and in July a court froze a $20 million bank deposit held by the firm at the bank’s request.

The firm in late August said construction at some of its developments had halted due to missed payments to contractors and suppliers. It sought repayment extension for a trust loan in early September, sources told Reuters, and media reports said Evergrande would suspend interest payments due on loans to two banks that month.

Liabilities, including payables, totalled 1.97 trillion yuan ($306 billion) at end-June – equivalent to 2% of China’s gross domestic product.

HOW HAS EVERGRANDE REDUCED DEBT?

Evergrande accelerated efforts to cut debt last year after regulators introduced caps on three debt ratios, dubbed the “three red lines”. It has been aiming to meet those requirements by the end of 2022.

It offered steep discounts on residential developments to spur sales and sold the bulk of its commercial properties. Since the second half of 2020, it has had a $555 million secondary share sale and raised $1.8 billion by listing its property management unit, while its EV unit told a $3.4 billion stake.

On Sept. 14, it said asset and equity disposal plans had failed to make material progress.

WHAT’S THE RISK?

China’s central bank said in 2018 companies including Evergrande might pose systemic risk to China’s financial system.

The firm’s liabilities involved as many as 128 banks and over 121 non-banking institutions, the leaked letter showed.

Late repayments could trigger cross-defaults as many financial institutions are exposed via direct loans and indirect holdings through different financial instruments.

OPERATIONS OUTSIDE MAINLAND CHINA?

In Hong Kong, Evergrande owns an office tower and residential development as well as two nearly completed residential developments, plus a vast undeveloped land parcel.

It has spent billions of dollars acquiring stakes in automobile technology developers, including Sweden’s NEVS, the Netherlands’ e-Traction and Britain’s Protean. It also has joint ventures with Germany’s Hofer and Sweden’s Koenigsegg.

WHAT DO REGULATORS SAY ABOUT EVERGRANDE, PROPERTY?

In comments reported by state media Xinhua and echoing words from the central bank, Vice Premier Liu He told a Beijing forum on Wednesday that the risks were controllable and that reasonable capital demand from property firms was being met.

The chairman of China’s securities regulator, Yi Huiman, said the authorities would properly handle the default risks and look to curb excessive debt more broadly.

Central bank Governor Yi Gang said on Sunday the world’s second-largest economy is “doing well” but faces challenges such as default risks for certain firms due to “mismanagement.”

Yi said China will fully respect and protect the legal rights of Evergrande’s creditors and asset owners, in line with “repayment priorities” laid out by China’s laws.

WHAT’S NEXT FOR EVERGRANDE?

Evergrande remitted $83.5 million to a trustee account at Citibank on Thursday, the source told Reuters, allowing it to pay all bondholders before the payment grace period ends on Saturday.

Still, the developer will need to make payments on a string of other bonds, with the next major deadline to avoid default only a week away and little known about whether it is in a position to pay those debts.

Evergrande missed coupon payments totalling nearly $280 million on its dollar bonds on Sept. 23, Sept. 29 and Oct. 11, beginning 30-day grace periods for each.

After a grace period ends, non-payment would result in formal default and trigger cross-default provisions for its other dollar bonds. Evergrande’s next payment deadline is Oct. 29, with the expiration of the 30-day grace period on its Sept. 29 coupon.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Clare Jim; Editing by Sumeet Chatterjee, Christopher Cushing and William Mallard)

To Be or Not to Be: How the Evergrande Crisis Can Affect Gold

Generals are always prepared to fight the last war, while economists are always prepared to fight the last recession. But what if the next economic crisis doesn’t start in the US financial sector, but in China’s real estate?

Naturally, I refer to Evergrande, a Chinese developer with total liabilities of more than $300 billion — around 2% of China’s GDP! A default of one of China’s largest and most indebted companies could entail significant repercussions for the global economy.

Although the Evergrande crisis won’t necessarily be China’s Lehman Brothers moment (I will elaborate on this in the upcoming edition of the Gold Market Overview), it will certainly curb China’s economic growth. Actually, the slowdown has already begun, as the country’s GDP grew just 4.9% in the third quarter of 2021, much less than the 7.9% seen in Q2. It was the slowest pace recorded in a year.

The slowdown is not surprising. After all, China faces a massive energy crunch, shipping disruptions, and a burst of the property bubble. Until recently, the bubble was tolerated or even actively boosted as it drove income and growth, benefiting everyone: developers, authorities, and also ordinary citizens who placed most of their savings in real estate. The property sector has grown so much that it accounts for about 30% of China’s GDP! So, given the size of China’s economy, it has become one of the most important sectors in the world.

However, China’s government decided to curb excessive borrowing and deflate the bubble. Perhaps the irrational exuberance became too irrational – just think about all these ghost towns with millions of empty apartments, not to mention the surge in corporate debt from 112% of GDP in 2008 to 222% in 2020 (see the chart below). So, last year, China’s government introduced the policy of “three red lines” which made it much more difficult for large developers such as Evergrande to issue more debt. This tightening caused a liquidity crisis, as well as a drop in property investment by 4% in September.

Here is the problem: the government wants to move away from a growth model based on investment and debt, but the country hasn’t transitioned to a consumption-led model yet. Thus, given the size of China’s property sector and a lack of new growth engines, we should expect a further slowdown in China’s (and global) economic growth.

Implications for Gold

What do China’s economic problems imply for the gold market? Well, the price of gold hasn’t been affected by the Evergrande crisis so far, remaining stuck below $1,800. Although, please remember that gold is most sensitive to the US economy, and we haven’t seen any signs of contagion spilling over the Chinese borders yet. However, the slowdown in global economic growth caused by the burst of China’s real estate bubble should bring us closer to the stagflationatory scenario, which should be positive for gold prices. The deceleration in China’s economic growth could abruptly change the narrative about a solid recovery from the pandemic, making investors worry more about inflation. A slowdown in economic growth could also lower bond yields, which should be supportive for the yellow metal.

Furthermore, even though most of the pundits downplay the risk of financial contagion stemming from the collapse of Evergrande (or other Chinese real estate developers), such a risk exists. If it materializes, gold should shine as a safe-haven asset.

Another possible implication is that China might devalue the yuan again. As investments are weakening and consumption hasn’t become a sufficient driver of the economy, the government could bet on exports to support the GDP growth. This could trigger some safe-haven inflows into gold, but there are also some risks here. As I wrote in 2017, “in the summer of 2015, China devalued the yuan, which pushed global equities lower. Hence, a devaluation of the renminbi would imply an appreciation of the U.S. dollar, which does not sound good for the gold market.”

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

Marketmind: Back to The Blues

Markets are in a somber mood on Thursday.

There is little let up on the Chinese property sector front with investors wondering how much damage the Chinese economy might suffer from a potential default of embattled property giant China Evergrande Group – now possibly just days away.

Evergrande shares suffered a double-digit tumble after it scrapped a deal to sell a stake in its property group, though it also secured an extension on a defaulted bond, according to media reports.

Adding to the woes is resurgence of COVID-19 and ensuing curbs. Russia is suffering record deaths and has reported some COVID-19 infections with a new coronavirus variant believed to be even more contagious than the Delta one.

Poland is facing an explosion of cases that may require drastic action, according to its health minister, while Latvia starts its lockdown today until mid-November to slow a spike in infections.

Futures point to more pain ahead for U.S. stocks later in the day.

But a batch of fresh earnings results might sooth some frayed nerves.

Unilever and Hermes sales beat estimates, Truck maker Volvo profit beats forecast, but companies do flag lingering chip woes.

Barclays Q3 beats expectations on strong investment bank performance, while Anglo American Q3 production inches higher.

Earnings highlights in the U.S. to come today are Intel, AT&T and Danaher.

In emerging markets, Turkey’s central bank will take centre stage. Policy makers are expected to deliver another interest rate cut despite stubbornly high inflation after President Tayyip Erdogan’s midnight reshuffle of the monetary policy committee.

Key developments that should provide more direction to markets on Thursday:

-EU starts two day summit

-NATO defense ministers meet

-U.S. initial jobless claims/Philly Fed index/existing home sales

-U.S. 5-year TIPS auction

-Fed speakers: San Francisco President Mary Daly

-Emerging markets: Turkey, Ukraine central banks

-U.S. earnings: AT&T, Blackstone, Dow, American airlines, Southwest airlines, Alaska Air, Intel Whirlpool Mattell

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Karin Strohecker)

Commodity Strength, Economic Recovery Brightens Indonesian Rupiah’s Prospects – Reuters Survey

Sentiments on the Singapore dollar turned positive, while bearish views on South Korea’s won, the Philippine peso and Malaysian ringgit eased, a survey of nine analysts and fund managers showed.

The rupiah, which is among the best performing currencies in the region with only a marginal drop so far this year, was supported by a hefty trade deficit on the back of soaring coal prices and improving economic conditions.

Indonesia, Southeast Asia’s biggest economy and the world’s biggest thermal coal exporter, is benefiting from a global energy crunch that is pushing coal prices to record highs due to a rise in consumption amid supply disruptions.

The Reuters survey was conducted before coal plunged on China’s vow that it was looking at ways to rein in prices. The rupiah dropped on Thursday on the same concerns, but analysts still remain upbeat on its long-term prospects.

Investor sentiment towards the Chinese yuan improved drastically following its rise to a six-month high this week, as markets bet the authorities would contain the fallout from debt-laden developer China Evergrande Group.

The rise in yuan comes despite the manufacturing powerhouse facing a sharp slowdown in factory activity, with power shortages and a property market crisis weighing on economic growth.

In Southeast Asia, reopening of economies and easing of social curbs boosted activity, as the Philippines, Malaysia, Thailand and Indonesia all lifted restrictions on travel and social gatherings.

That prompted foreign investors to cash in on the growth prospects in the region, and became net buyers of Asian bonds for a sixteenth straight month in September.

Meanwhile, bearish views on the Indian rupee increased, prompted by surging oil prices as India is the world’s third-biggest oil consumer. The rupee has lost nearly 1% this month so far.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Sameer Manekar in Bengaluru; editing by Uttaresh.V)

Stocks Slip, Yen Jumps as Evergrande Jitters Return

The more cautious tone looked set to take hold globally as well, with European futures and FTSE futures down 0.3% and S&P 500 futures dipping 0.2%.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3% after briefly touching a one-month high. Japan’s Nikkei fell 1.5% as the safe-haven yen rose broadly.

Commodities also eased, with Brent crude futures down 0.2% after touching a three-year top and Chinese thermal coal futures> extending a pullback in the wake of signals that Beijing will intervene to cool prices.

“The U.S. stock market has gone up for six days in a row, bitcoin’s made a record and the U.S. bond market is calm. On the surface it looks benign,” said Andrew Ticehurst, a rates strategist at Nomura in Sydney.

“But below the surface we are uncomfortable about a number of things,” he added, chiefly the slowdown in China’s economy seen in data earlier this week, and concerns about potential fallout from Evergrande’s troubles.

China Evergrande Group has secured an extension on one defaulted bond, financial news provider REDD reported on Thursday, as the company scrambles for cash before a grace period for a dollar bond coupon payment expires on Saturday.

Late on Wednesday Evergrande said a deal to sell a $2.6 billion stake in its property services unit failed and its shares fell 12% in Hong Kong on Thursday.

Shares in rival developers drew support thanks to reassurance from a number of top Chinese officials that the trouble in the sector would not be allowed to escalate into a full-blown crisis, but global investors remain nervous. [.SS]

“We may see more Evergrande headlines weighing on China markets into the end of the week as the first 30-day grace period on unpaid offshore bonds approaches,” said Jeffrey Halley, analyst at broker OANDA.

YEN HALTS SLIDE

Wall Street had offered a positive lead after earnings helped the Dow Jones touch an all-time high and left the S&P 500 within a whisker of its record closing high.

The VIX volatility index, sometimes referred to as Wall Street’s “fear gauge”, dropped to a two-month low.

But a soft finish on the Nasdaq flowed through to tech-stock selling in Tokyo and in Hong Kong, where the Hang Seng fell 0.8%.

Longer-dated Treasury yields steadied after rising with inflation and growth expectations on Wednesday, with the benchmark 10-year yield at 1.6568%, just below the previous day’s five-month high of 1.6730%.

Investors have figured that surging energy prices and tightening job markets will pressure policymakers in the United States and elsewhere to raise interest rates before long, but stocks have scarcely reacted to shifts in rates pricing.

Fed funds futures have priced a 25 basis point U.S. rate hike in the third quarter of 2022 while eurodollar markets expect higher rates as soon as the second quarter.

“In our view, the dollar and yen face upside risks if inflation concerns spark a sharp tightening in global short-term interest rates and a sharp pullback in equity markets,” said Commonwealth Bank of Australia currency analyst Carol Kong.

The yen rose 0.3% against to 114.06 per dollar on Friday and steadied against other currencies after a long slide. The Australian dollar dipped 0.2% to $0.7501 after touching a three-month high.

China’s yuan , hovered at it strongest level in four months against the greenback, after the central bank set its official midpoint rate on Thursday below 6.4 per dollar for first time since June.

Investors are growing nervous over authorities’ apparent absence of concern about the yuan’s recent ascent, which has also taken it to its strongest level in six years against the currencies of China’s major trading partners.

Bitcoin, which hit a record on Wednesday in the wake of the U.S. listing of a futures-based exchange traded fund, eased from its peak to $64,951, while fellow cryptocurrency ether hit a five-month top of $4,243.

(Reporting by Tom Westbrook in Singapore; Editing by Sam Holmes and Kim Coghill)

China’s Economic Wobbles Cast Long Shadow for Asia

China’s gross domestic product faltered in the third quarter, data showed this week, with growth hitting its weakest in a year, hurt by power shortages, supply chain snags and a property market crisis.

For China’s trading partners, the slippage presents new risks to what is shaping up to be a bumpy global recovery from the pandemic slump.

“Yes, growth elsewhere, namely the U.S. and Europe, appears robust,” wrote Frederic Neumann, co-head of Asian economics research at HSBC. “But it is China that’s been the main engine for growth across the region – and as it sputters, Asian economies will lose much of their torque.”

HSBC analysis showed Asia-Pacific economies from South Korea to New Zealand far more correlated to changes in China’s growth than they were to changes in U.S. or European GDP.

For every percentage point China added to its growth, trade powerhouse South Korea reported about 0.7 of point of additional growth, the bank’s economists said.

South Korea was by far the most sensitive to changes in Chinese growth, according the analysis, followed by exporting nations Thailand and Taiwan.

An anticipated Chinese slowdown has already prompted Citi analysts to downgrade growth projections for economies in the region, including South Korea, Taiwan, Malaysia, Singapore and Vietnam.

A Reuters Corporate Survey last week showed a majority of Japanese firms were concerned that a slowdown in China, Japan’s largest trading partner, would affect their business.

The slowdown is being felt across most of China’s economy, from the retail to factory sectors, which posted its weakest output growth since the start of the pandemic.

China’s auto sales slumped 19.6% in September from a year earlier, industry data showed last week, falling for a fifth consecutive month amid a prolonged global shortage of semiconductors and the power crunch.

Similarly, sharp declines in new construction starts in China’s property market, due to a regulatory crackdown, loom as risks for exporters of raw materials, such as Australia.

Iron ore prices have nearly halved since hitting a record in mid-May, with demand hurt by China’s steel output curbs and the property slowdown.

Last week, mining giant Rio Tinto downgraded its 2021 iron ore shipments forecast, mostly due to tight labour market conditions in Australia, but it also warned of headwinds from China’s regulatory crackdown.

‘STAGFLATION’

Despite the risks from China, analysts say Asia will be able to prevent a precipitous collapse in domestic demand, as improved vaccination rates allow countries in the region to shake off COVID-19 restrictions.

Similarly, Chinese demand for some goods, such as fuel and food, remains firm. That means for now, central banks are unlikely to swerve from their general shift away from crisis era monetary settings.

Singapore last week tightened its monetary policy.

Beyond the broader demand shock, complications for economies in Asia and elsewhere could come from worsening supply-side problems in China, such as the power crunch.

So far, China’s manufacturers and exporters have yet to significantly pass on higher costs caused by supply shortages of everything from coal to semiconductors.

But analysts warn the situation around inflation is fluid.

While weaker demand could relieve pressure on prices, supply chain bottlenecks, if unresolved, could create a “stagflation” nightmare in which surging prices are accompanied by stagnant growth.

“I think it could potentially be a bit of a double whammy now. Because China is one of the economic engines for the region, any slowdown can affect the demand for regional goods and services,” said Selena Ling, head of treasury research and strategy at OCBC Bank.

“Secondly, the ongoing power crunch, in all likelihood, policymakers will prioritise home (use) for winter demand over industrial activity. So that could exacerbate global supply chain disruptions.”

For a look at all of today’s economic events, check out our economic calendar.

(Additional reporting by Tetsushi Kajimoto, Kantaro Komiya and Leika Kihara in Tokyo; Orathai Sriring in Bangkok; and Tom Westbrook in Singapore; Writing by Sam Holmes; Editing by Raju Gopalakrishnan)

China Evergrande Makes Onshore Coupon Payment – Sources

Hengda Real Estate Group Co, Evergrande’s flagship unit, has remitted funds to pay an onshore bond coupon of 121.8 million yuan ($19 million), the people said.

One of the people said Evergrande, China’s No. 2 developer, needs to prioritises its limited funds towards domestic market where the stakes are much higher for the country’s financial system.

The liquidity crisis at Evergrande, which has $300 billion in debt and has missed a series in bond payments, has roiled global markets. High-yield bonds issued by Chinese property developers have been especially hammered.

An Evergrande bond due March 23, 2022 will officially be in default if the company does not make good after a 30-day grace period for a missed coupon payment that had been due on Sept. 23.

But the offshore bond market has responded positively after China central bank’s assuring comment and coupon payments of two major developers.

An index of China high-yield debt, which is dominated by property developer issuers, has seen spreads tighten from last week’s record levels to around 1,484 points on Tuesday.

Sunac China, which has a $27.14 million payment due Tuesday, has paid its bondholders, a source with direct knowledge of the matter said.

The source was not authorised to speak to media and declined to be identified. A Sunac representative declined to comment.

Kaisa Group said on Monday it has paid a coupon due Oct. 16 and it plans to transfer funds for a coupon worth $35.85 million due Oct. 22 on Thursday.

In the past few days, the People’s Bank of China has said spillover effects on the banking system from Evergrande’s debt problems were controllable and that China’s economy was “doing well”.

Bonds from Chinese developers that gained on Tuesday included Modern Land’s 2022 bonds which bounced over 8% to 40.250 cents on the dollar, while Central China Real Estate’s 2024 bonds climbed over 5% to 44.843 cents.

On Monday, smaller developer Sinic Holdings defaulted on $246 million in bonds as expected. It had warned of the default last week, saying it did not have sufficient financial resources.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Clare Jim in Hong Kong, Samuel Shen in Shanghai, Shanghai newsroom and Beijing newsroom; Editing by Edwina Gibbs and Lincoln Feast)

Evergrande Debt Woes Are Manageable, China Central Bank Official Says

Chinese authorities are urging Evergrande to step up asset disposals and the resumption of projects, Zou Lan, head of financial markets at the People’s Bank of China (PBOC), told a briefing, adding that individual financial institutions did not have highly concentrated exposure to Evergrande.

“In recent years, this company did not operate and manage itself well. It failed to conduct prudent operations according to changing market conditions, and it blindly diversified and expanded its business,” Zou told the briefing in Beijing.

Chinese officials and state media have been largely silent on the crisis at Evergrande, which has missed a series of bond interest payments and has $300 billion in debt, making it the world’s most indebted developer.

Zou also said property firms that have issued bonds overseas should actively fulfil their debt repayment obligations.

Evergrande has left its offshore investors in the dark about repayment plans after already missing three rounds of interest payments on its dollar bonds.

Zou’s comments came as sources told Reuters that Evergrande CEO Xia Haijun was holding talks in Hong Kong with investment banks and creditors over a possible restructuring and asset sales.

Xia had been in Hong Kong for more than two months, several sources told Reuters. Xia needed to communicate with foreign banks on loan extensions and repayments, one of the sources said.

Joining a list of property developers reeling from the debt crisis, China Properties Group Ltd said on Friday it had defaulted on notes worth $226 million.

Another Chinese developer, Xinyuan Real Estate Co’s, avoided a default on a maturing dollar bond on Friday, saying in a Singapore Exchange filing that bondholders had agreed to an offer to accept new bonds and cash in exchange for maturing notes.

Xinyuan said that holders of more than 90% of the company’s $229 million notes due Oct. 15 had agreed to the exchange, which would see it deliver new bonds worth $205.4 million and $19.1 million cash.

Xinyuan’s 14.5% September 2023 bond crashed nearly 30% on Friday to trade at 58.35 cents, according to data provider Duration Finance.

The agreement follows warnings from other developers that they could default on their bonds, while still others have taken steps to delay payments in the wake of Evergrande’s troubles.

Evergrande, with 1,300 real estate projects in more than 280 cities, missed a third round of interest payments on its international bonds this week.

However, in a separate statement filed to the Shenzhen Stock Exchange, Evergrande said it would pay interest coming due on Oct. 19 on a yuan-denominated bond it issued in 2020.

PBOC URGES SPEEDY ASSET SALES

At the Friday briefing, Zou said Evergrande should step up asset disposals and the resumption of project building, for which authorities will provide financing support.

Some lenders have had “misunderstandings” about the central bank’s debt control policies, causing financial strains for some developers, as some new projects were unable to get loans even after repaying existing loans, Zou said.

“This short-term extreme reaction is a normal market phenomenon,” he said.

Chinese developers face more than $500 million in coupon payments on their high-yield bonds before the end of this month. Refinitiv data show coupon payments by Kaisa Group Holdings and Fantasia Holdings are due this weekend.

“In some cities, the property prices surged too fast, causing the approval and issuance of personal mortgages to be restrained,” Zou said, referring to the first nine months of this year.

“Once housing prices stabilise, the supply and demand of mortgages in those cities will be normalized too,” he said.

FRESH SETBACKS

Still, Evergrande suffered fresh setbacks on Friday with sources telling Reuters that Chinese state-owned Yuexiu Property pulled out of a proposed $1.7 billion deal to buy the company’s Hong Kong headquarters building over worries about the developer’s dire financial situation.

Evergrande has been scrambling to divest some assets to repay creditors knocking on its doors and the collapse of the talks shows the difficulties it is facing.

Adding to its woes, Hong Kong’s audit regulator said on Friday it was investigating Evergrande’s 2020 accounts and their audit by PwC because it had concerns about the adequacy of reporting on whether it could continue operating as a going concern.

Evergrande bonds fell following the Reuters report. The company’s 8.75% June 2025 bonds slumped more than 6% to trade at a discount of more than 80% from its face value, according to data provider Duration Finance.

BOND SLUMP DEEPENS

Apart from Xinyuan, Duration Finance data showed other developers’ bonds deepening their rout. Sinic Holdings Group’s 10.5% June 2022 bond dived more than 20% to just 12.25 cents, and Ronshine China Holdings’ February 2022 bond fell more than 6% to 68.35 cents.

Moody’s downgraded Risesun Real Estate Development Co Ltd to B1/B2, with a negative outlook.

Spreads on Chinese high-yield corporate dollar bonds touched a fresh record late Thursday evening U.S. time, having nearly tripled since late May, while investment-grade spreads remained near their widest in more than two months.

Worries of contagion have also hit property developers’ shares this week. On Friday, an index tracking A-shares in the sector gave up small gains to end down 0.1%, lagging a 0.38% gain in the blue-chip index and taking losses since Tuesday to 4.5%.

China has been ramping up property market curbs since late 2020, introducing new measures to closely monitor and control developers’ debt levels.

But with economic growth cooling and new construction starts slowing, speculation has been rife over whether it will start relaxing those restrictions, as was the case during previous downturns.[ECILT/CN]

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Andrew Galbraith, Cheng Leng, Kevin Yao and Tony Munroe, additional reporting by Alun John, Karin Strohecker and Noel Randewich; Editing by Kim Coghill, Jacqueline Wong and Nick Macfie)

China Developer Shares Slide as Evergrande Concerns Simmer

Evergrande, which has more than $300 billion in liabilities and 1,300 real estate projects in over 280 cities, missed a third round of interest payments on its international bonds this week.

The world’s most indebted developer, which has been trying to sell assets to raise funds, appeared to have made small progress towards that goal when Qumei Home Furnishings Group announced in a filing on Thursday that it will buy out Evergrande group’s 40% stake in their furnishings joint venture for 72 million yuan ($11.18 million).

But some other Chinese developers have also warned they could default, and rising risks on Wednesday led credit agency S&P Global to downgrade to two of the sector’s bigger firms, Greenland Holdings – which has built some of the world’s tallest residential towers – and E-house, and warn it could cut their ratings further.

Adding to the concerns of investors who have increasingly been hoping for policy easing to stabilise a wobbly recovery in the world’s second-largest economy, data on Thursday showed China’s annual factory gate prices rising at the fastest pace on record in September due to soaring raw material costs.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said persistent inflationary pressure would limit the scope of any monetary policy easing.

“But the most important policy in the property sector is not monetary policy, but the regulation related to leverage and bank loan supply to developers (and) home buyers,” he said.

“Therefore I think the government still has the option to loosen those policies to help the property sector. The big question is whether they are willing to do so. So far their policy stance seems quite firm.”

On Thursday, a sub-index tracking shares of Chinese property developers ended the day down 3.88% while the broad CSI300 blue-chip index slipped 0.54%. Property shares have fallen nearly 20% this year, compared to a 5.7% fall for the CSI300.

China property shares would remain volatile in the near term, JPMorgan analysts said in a report.

“News on marginal easing will likely cause a short-term rebound, which, however, may not be very sustainable due to the likely ongoing concerns on the offshore bond market,” they said.

“A more sustainable rally may happen in January 2022 when banks have more front-loaded quota to extend credit to developers/mortgages.”

LIGHTNING RODS

In China’s onshore bond market, prices underscored continued volatility, with bonds of developer Shanghai Shimao listed among both the biggest gainers and biggest losers on the day by the Shanghai Stock Exchange.

“Property bonds are lightning rods,” said a director at a local brokerage. Apart from the risk of debt contagion from Evergrande, higher mortgage rates – part of official efforts to rein in surging housing prices – are hitting the industry, he said. “Fundamentally, the high turnover of real estate companies is gone.”

In international debt markets, data provider Duration Finance showed Greenland Group Holdings’ 6.75% June 2022 bond was trading down more than 3 points at 60.175 cents, and Xinyuan Real Estate’s 14.5% September 2023 bond slumped nearly 8 points to 63.9 cents.

Markets in Hong Kong were closed on Thursday for a public holiday.

Global worries over the potential for spillover of credit risk from China’s property sector into the broader economy kept spread – or risk premium – on investment-grade Chinese firms, which tend to have the most solid finances, near its widest in more than two months on Wednesday evening U.S. time.

The spread on the equivalent high-yield or ‘junk’-rated index that tracks firms such as Evergrande pulled back on Wednesday, but remained close to all-time highs.

For a look at all of today’s economic events, check out our economic calendar.

($1 = 6.4391 Chinese yuan)

(Reporting by Andrew Galbraith; Editing by Muralikumar Anantharaman and John Stonestreet)

Festering Evergrande Contagion Worries Push China Spreads to Record

The company, which has more than $300 billion in liabilities, on Monday missed its third round of interest payments on its dollar bonds in three weeks even as other firms warned of defaults.

In the clearest sign yet of global investors’ worries of spreading debt contagion, the option-adjusted spread on the ICE BofA Asian Dollar High Yield Corporate China Issuers Index surged to a fresh all-time high of 2,337 basis points on Tuesday evening U.S. time, above a previous top of 2,069 basis points on Friday.

Investment grade spreads also jumped to their widest in more than two months.

“We see a risk that a disorderly correction in the property market could cause sharp price declines, hitting the personal wealth of homeowners,” Kim Eng Tan, a credit analyst at S&P Ratings, said in a report.

“Such an event could also contribute to large-scale losses by investors in wealth management products, and the contractors and service firms that support the developers.”

Evergrande did not pay nearly $150 million worth of coupons on three bonds due on Monday, following two other missed payments in September.

While the company has not technically defaulted on those payments, which have 30-day grace periods, investors say they are expecting a long and drawn-out debt restructuring process.

Chinese property companies’ bonds continued to fall on Wednesday, comprising seven of the top 10 losers among Shanghai-traded corporate bonds.

Bonds issued by developers including Shanghai Shimao Co Ltd China Aoyuan Group and Country Garden Properties Group fell between 1.6% and 7.4%, according to exchange data.

Dollar bonds also fell, although traders said limited market liquidity following earlier routs meant prices were only indicative, with tradeable prices possibly 10-20 points lower than screen prices.

Marketaxess quoted a Kaisa Group Holdings June 2026 bond as falling 0.9% to 41.125 cents. Its yield has risen to around 40%.

In equity markets, a sub-index tracking A-shares of property firms fell 0.7% against a 1.2% rise in the blue-chip CSI300 index.

Markets in Hong Kong were closed on Wednesday due to a typhoon affecting the city.

WALL OF DEBT

Evergrande’s main unit, Hengda Real Estate Group Co, faces a 121.8 million yuan onshore bond coupon payment on Oct. 19 and Evergrande has another $14.25 million dollar bond coupon due on Oct. 30.

Debt pressures extend far beyond Evergrande. Chinese property developers have $555.88 million worth of high-yield dollar bond coupons due this month, and nearly $1.6 billion due before year-end, and Refinitiv data shows at least $92.3 billion worth of property developers’ bonds maturing next year

Evergrande’s mid-sized rival Fantasia has also already missed a payment and Modern Land and Sinic Holdings are trying to delay payment deadlines that would still most likely be classed as a default by the main rating agencies.

“These stories have challenged the notion that Evergrande is one of a kind,” analysts at Capital Economics wrote in a note.

While China’s policymakers will likely be able to avoid a “doomsday scenario”, the overextended property sector will continue to weigh on the world’s second-largest economy, they said.

“Even following an orderly restructuring of the worst-affected developers with minimal contagion to the financial system, construction activity would still almost inevitably slow much further.”

The IMF said on Tuesday that China has the ability to address the issues linked to Evergrande’s indebtedness, but warned that an escalation of the situation could lead to the emergence of broader financial stress.

The $5 trillion Chinese property sector, accounts for around a quarter of the Chinese economy by some metrics and is often a major factor in Beijing policymaking.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Andrew Galbraith; Editing by Muralikumar Anantharaman and Kim Coghill)