China seeks to insulate, not save property giant          

Beijing has stepped up efforts to limit the fallout from  Evergrande's attempts at  a massive restructuring

Evergrande headquarters in Shenzhen in China: Shares in the property giant have been suspended.

As China's Evergrande edges closer to a massive restructuring, Beijing has stepped up efforts to limit the fallout, signalling it’s willing to prop up healthy developers, homeowners and the property market at the expense of global bondholders.

In the last week alone, Chinese authorities have dispatched top financial regulators to nudge the country’s massive banks to ease credit for homebuyers and support the property sector. They also bought out part of Evergrande’s stake in a struggling bank to limit contagion. The central bank meanwhile has pumped €105bn into the financial system over 10 days to ease liquidity.

The moves underscore that China will do everything it can to ring-fence Evergrande, while showing little interest in a direct bailout of the developer that has roiled global markets for weeks. That doesn’t bode well for bondholders — both onshore and abroad — looking for some kind of rescue from the Chinese government.

“The first obligation is going to make sure that homeowners who bought those homes take delivery and are made whole.” 

So says Marathon Asset Management chief executive Bruce Richards. “At the very end of the pecking order are offshore bondholders.” 

Contagion

For China, the risk of contagion far outweighs any potential damage from an Evergrande collapse on its own. Though Evergrande is one of the largest developers in China, it accounts for just 4% of sales in the country. A run on property firms in the wake of an Evergrande failure threatens to destabilise an industry that accounts for 29% of China’s economy, according to new research from Harvard University economist Ken Rogoff.

Already, developers such as Sunac China Holdings and Guangzhou R&F Properties have plunged in trading. 

Evergrande and its property services arm were halted in Hong Kong stock trading pending an announcement on a “major transaction,” the developer said.  Hopson Development plans to acquire a 51% stake in Evergrande’s property services unit, according to Chinese financial news platform Cailian.

China also faces a potential backlash from the 1.6 million homebuyers who put deposits on Evergrande apartments that have yet to be built. 

“A disorderly default of Evergrande is unlikely because of the broad-based risk it presents to a large amount of the Chinese population,” said Alejandra Grindal, chief economist at Ned Davis Research Inc. “The government is probably less concerned about restructuring the offshore debt.” 

• Bloomberg