Investors looking for clues on how Beijing plans to deal with the China Evergrande Group debt crisis are training their sights on central bank liquidity management.
The People’s Bank of China will resume daily open market operations on Wednesday after the holidays, and a large net injection may indicate Beijing’s intention to reduce systemic stress after the Evergrande crisis rocked global stocks. On the other hand, if the BPC withdraws funds, that could mean that it is prepared to tolerate increased market volatility as the developer approaches default.
The need to calm market jitters may be even more pressing if mainland stocks slide on resumption of trading on Wednesday as they catch up on losses posted abroad. The Hang Seng China Enterprises Index, an indicator of Chinese stocks listed in Hong Kong, plunged more than 3% when China closed on Monday and Tuesday, even as Wall Street analysts sought to assure investors that Evergrande will not lead. to a Lehman moment.
“China has left the market on edge,” said Zhou Hao, a senior economist at Commerzbank AG in Singapore. “Traders cannot understand what Beijing thinks about how the Evergrande crisis will be resolved and how weak the economy is allowed to be. In the short term, the People’s Bank of China will inject enough short-term liquidity to maintain an ample supply of cash. ”
Uncertainty about how financial problems would be resolved at China’s largest real estate developer, with $ 300 billion in liabilities, has increased as authorities have refrained from providing public guarantees on a state-led resolution. Official media comments have largely avoided the issue, aside from a tabloid that said Evergrande was an “isolated case.” The slowdown in China’s economy has compounded investor distress.
Still, while mainland equity markets may follow Hong Kong stocks plummeting on Wednesday, many analysts, including those at Citigroup Inc., Barclays Plc, and UBS Group AG, say the Evergrande crisis is not it is likely to be the country’s “Lehman moment.” ”
The People’s Bank of China has moved at least in the right direction, pushing cash injections last week to the highest level since February. The central bank will need to add 130 billion yuan ($ 20 billion) of net Wednesday to ensure liquidity matches Saturday’s level.
China’s cash operations have been aimed at striking a balance between stimulating growth affected by new virus outbreaks and tighter regulations, while avoiding asset bubbles. The authorities also tend to loosen their grip on liquidity towards the end of the quarter due to increased demand for cash from banks for regulatory checks. Lenders must also accumulate more funds before the week-long vacation in early October.
Simply increasing liquidity will not be enough to solve the Evergrande crisis on its own, said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc in Hong Kong.
“What the market expects the government to do is come up with a plan that can help the company restructure and refinance smoothly,” he said. “China’s bottom line is that it will not allow the Evergrande problem to turn into a full-blown financial crisis or allow it to unleash systemic risks.”
Evergrande defaulted on interest payments due Monday to at least two of its largest bank creditors, said people familiar with the matter, who asked not to be identified when discussing private information. About $ 83.5 million in interest on a five-year dollar bond sold by the company is due Thursday, and failure to pay within 30 days may constitute a default. The company must also pay a 232 million yuan coupon on a shore bond on the same day.
Commercial banks will announce the latest benchmark credit rate on Wednesday, although analysts expect the one-year rate to remain unchanged at 3.85%.
© 2021 Bloomberg