Markets may have been calmed today by soothing words from the embattled property developer Evergrande’s chairman but Indonesia’s finance minister warned today of the potential knock-on effect to regional economies if it were to go bust.
Evergrande’s share price to close 17.62% higher at HKD2.67 following a Reuter’s report that the chairman had told the firm’s executives to prioritise repayments of wealth management products, but speaking at monthly economic briefing, Indonesia’s finance minister Sri Mulyani was still wary.
“There’s a new risk coming from China’s financial system stability on the back of Evergrande default…With total debt of $300bn, the situation is very complex, with [potentials for] major ripple effect domestically in China and globally. We need to be vigilant on developments in China,” she said.
A slowdown in China will impact Indonesia, which exports nickel, coal and steel. Rising prices of commodities have helped the country in the recent past and the trade surplus reached a record high in August.
Second and third order impacts
With a debt of over $300bn, investors across the world have been fearing the impacts of Evergrande’s default. According to experts, Evergrande has $83.5m in offshore bond interest payments due on Thursday, which it is expected to miss. More interest payments are due next week.
HSBC, which according to Capital Economics is one of the top three Evergrande offshore bondholders, also cautioned over the potential for a default to ripple through the region’s capital markets.
“I’d be naive to think that the turmoil in the market doesn’t have the potential to have second-order and third-order impact,” Noel Quinn, CEO of HSBC, said at a Bank of America conference on Wednesday (22 September).
No systemic crisis – yet
Quinn added that Evergrande’s situation was “concerning” particularly on the stock and the bond markets.
However, according to Julian Evans-Pritchard, senior China economist at Capital Economics, the signs of a “systemic crisis” emerging out of Evergrande’s default is not yet there.
Speaking at a webinar to discuss the impact of Evergrande’s default, Evans-Pritchard made it clear that this is not China’s Lehman moment. He said that there are two ways the default turns into a systemic crisis – if a local bank has high concentrated exposure to Evergrande collapses or the more likely scenario, property prices in China start to fall.
Housing market still robust
He added that a local bank failing is improbable as the Chinese government will step in and support the financial system, however, homebuyers may become a variety of under-construction houses if they don’t get what they bought from Evergrande, leading to a fall in prices.
“We will closely monitor high-frequency data on housing prices and housing sales. Earlier, we used to look at this every month. But so far, the data does not suggest a major slowing of housing prices or sales,” he said.
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