Global Traders Given Evergrande Reprieve as PBOC Adds Liquidity
Comment of the Day

September 22 2021

Commentary by Eoin Treacy

Global Traders Given Evergrande Reprieve as PBOC Adds Liquidity

This article from Bloomberg may be of interest to subscribers. Here is a section:

China’s central bank boosted its gross injection of short-term cash into the financial system after concern over a debt crisis at China Evergrande Group roiled global markets. 

The People’s Bank of China pumped 120 billion yuan ($18.6 billion) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan. That matches the amount seen on Friday, and was just below that of Saturday. Sentiment was also boosted after Evergrande’s onshore property unit said it plans to repay interest due Thursday on its local bonds. 

“The PBOC’s net injection is probably aimed at soothing nerves as the market worries about Evergrande,” said Eugene Leow, a senior rates strategist at DBS Bank Ltd. in Singapore. “While the aim may be to instill discipline, there is also a need to prevent contagion into the real economy or to other sectors.”

The need to calm market jitters is pressing amid losses in China-related equities worldwide over recent days amid concern over Evergrande’s debt woes. The benchmark CSI 300 Index fell as much as 1.9% Wednesday after the Hang Seng China Enterprises Index -- a gauge of Chinese shares traded in Hong Kong -- slid the most in two months on Monday. Losses came even as Wall Street analysts sought to reassure investors that Evergrande won’t lead to a Lehman moment.

Eoin Treacy's view

Any way we look at it, China will need to print more money. If the Evergrande issue is resolved through restructuring in a timely manner it will be less. If the issue is fudged and the hit to the economy is deep, it will be more. Following the announcement that a domestic bond coupon will be paid, there is only one question. What about international investors?

Evergrande has been by far the biggest issuer of US Dollar bonds in the emerging markets. Those bonds have been purchased by international investors and sit in emerging market corporate bond funds. It is looking increasingly likely that domestic interests will take precedence over international investors regardless of what credit seniority would normally dictate.

Another way of thinking about it is Evergrande holds large swathes of land and positions in strategic companies. China is in no mood to allow those assets to fall into the hands of foreign investors during a bankruptcy. That suggests foreign recovery rates will be at the lower end of any scale. Ultimately, that will result in greater reluctance to lend to Chinese companies in the future.  

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