China’s Trouble Is Now About Much More Than Evergrande

(Bloomberg) -- The fate of global markets depends on how well China manages its broader property sector issues, but not specifically on how the China Evergrande Group debacle plays out.

For months now, traders have woken up to a slew of Evergrande stories -- how to interpret them? It’s the world’s most indebted real estate company, which sounds dramatic and worrying, but surely this problem is well-known and will be handled appropriately by a China government with immense policy latitude? So when you see headlines about Evergrande’s shares sinking after talks of a deal ended, what are the takeaways?

• The share price move is almost irrelevant. It trades like a penny-stock and the corporate bond market is more important
• The collapse in the attempted sale of its property management arm is relevant not just because it makes a default more likely. The causes matter too: Creditors objected to the assets being sold so cheaply rather than it just being about China’s government providing insufficient support for such deals
• We’ve heard about so many bond deadlines that have passed without the world ending, is this one any different? Yes, because this weekend is the end of the grace period for a coupon payment that was actually due last month. So technical default would appear unavoidable if this one is missed (albeit the scope for somehow fudging these issues is still there)
• However, perhaps the most worrying takeaway is that “real estate sales plunged about 97% during peak home-buying season.” China can survive Evergrande’s collapse; its economy and global markets will both be decimated if there’s a systemic property-market correction. On that front though, the overall picture is more nuanced as higher-rated companies are doing better amid signs of ample policy support

This was a post on Bloomberg’s Markets Live blog. The observations are those of the blogger and not intended as investment advice. For more markets analysis, go to MLIV.

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