China’s trouble is now bigger than Evergrande

For months now, traders have woken up to a series of Evergrande stories – how to interpret them? It is the world’s most indebted real estate company, which sounds dramatic and worrying, but surely the problem is well known and will be appropriately handled by the Chinese government with extreme policy latitude? So when you hear headlines about Evergrande shares sinking after negotiations for a deal are over, what are the conclusions?

• Share price fluctuations are almost irrelevant. It trades like a penny stock and more importantly the corporate bond market.
• The collapse in an attempt to sell its asset management arm isn’t relevant simply because it makes a default more likely. Reasons matter too: creditors object to assets being sold so cheaply, rather than being about China’s government providing insufficient support for such deals.
• We’ve heard of many bond deadlines that have passed without ending the world, is this any different? Yes, because this weekend is the end of the discount period for coupon payments that were actually due last month. So technical lapses would seem inevitable if it gets missed (though there is still room for tampering with these issues anyway)
• However, perhaps most worryingly, “real estate sales declined by almost 97% during the peak home buying season.” China could survive the collapse of Evergrande; If a systemic asset-market correction occurs, both its economy and global markets will be destroyed. But however, the overall picture is more nuanced as higher-rated companies outperform amid signs of substantial policy support.