China urges property developers to pay international debts

China’s economic planning agency encouraged the country’s companies to repay their international debts days ahead of another payment deadline for property developer Evergrande after it narrowly avoided a default last week.

The National Development and Reform Commission, the state’s economic planning agency, said late on Tuesday that companies should prepare to pay the principal and interest of offshore bonds to maintain their reputation and the order of the market.

The agency did not mention any companies by name but the announcement was made after Evergrande, the developer which has more than $300bn of liabilities and has come to embody concerns about the sector, made a last-minute interest payment on its offshore bonds on Friday.

A growing number of the company’s peers have defaulted in recent weeks. Modern Land said in an official filing in Hong Kong on Tuesday that it had failed to pay the $250m of interest and principal due the previous day, following defaults from Fantasia and Sinic this month.

Many expect that Evergrande will require one of the biggest restructuring processes in Chinese history and its late payment has raised questions about Beijing’s stance behind the scenes. A failure to make the transfer would have marked an official default following the expiry of a 30-day grace period.

“The majority of investors think if the government does nothing Evergrande [will] struggle to pay on time,” said one investor based in Hong Kong, who pointed to other looming payment deadlines and added that default was “still a base case”. The person said that they did not expect the government to be directly involved but “policies and guidelines might ease further”.

Chinese property developers make up a large portion of overall borrowing on Asian’s high-yield bond market, where yields have risen sharply over the past month. The companies have come under pressure from the government’s so-called “three red lines” policy, which is designed to constrain their access to debt and was introduced to avoid excess borrowing amid fears of asset bubbles.

But rising defaults across the industry, which contracted in the third quarter for the first time since the start of the pandemic, have added to the challenges for policymakers.

Evergrande, which faces the end of another grace period on missed payments this Friday, has not provided any official exchange filing or statement regarding its payment to bondholders, which was initially reported in Chinese state media. An investor subsequently confirmed to the Financial Times that the funds had been received.

The company said on Sunday that it had resumed work at some of its projects, which were halted because of delayed payments to suppliers.

The Chinese government has not outlined its precise role in Evergrande’s situation but has signalled that a bailout is unlikely. A People’s Bank of China official this month blamed the company for its woes and said that any spillover to the financial system was “controllable”.

The Hang Seng index of mainland developers, which has lost a quarter of its value in the past six months, rose 0.1 per cent on Wednesday following the NDRC announcement.

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