Evergrande shares jump as developer says spat with bank resolved

Shares in China Evergrande jumped from four-year lows after the highly indebted property group announced it had resolved a legal dispute with a Chinese bank.

The developer, led by billionaire Hui Ka Yan, is being closely tracked by regulators, investors and rating agencies, which are concerned about the potential for contagion to China’s financial system and systemic risks stemming from Evergrande’s towering debts.

The company’s shares and bonds have been selling off since traders at the weekend circulated a Jiangsu province court order issued earlier this month that had frozen a Rmb132m ($20.4m) bank deposit for Evergrande’s mainland Chinese division.

Sentiment soured further on Tuesday after authorities in Shaoyang, a city in China’s Hubei province, said sales at two of the company’s projects had been temporarily halted because of a shortage of funds in presales accounts.

But Evergrande’s Hong Kong-listed stock rose 9 per cent on Thursday after the company said its legal quarrel with China Guangfa Bank over the loan had been resolved.

Evergrande’s offshore dollar bonds maturing in 2025 fell to a record low of 47 cents on the dollar on Thursday before pulling back to about 51 cents, Bloomberg data showed.

Evergrande shares remained down 46 per cent this year.

Last Friday, the stock jumped almost 10 per cent year after the cash-strapped company dangled the prospect of a surprise dividend payment this month.

Persistent uncertainties remain over how Hui, formerly China’s richest man, would be able to refinance the group’s vast debts.

“It’s a dead cat bounce, but not for long because there ares quite a few issues [at Evergrande] yet to be resolved,” said Louis Tse, managing director of Hong Kong-based brokerage Wealthy Securities, of the share price rise on Thursday.

Fitch, the US rating agency, downgraded the Chinese developer last month from B plus to B for its long-term foreign currency ratings, a move that reflected pressures on Evergrande to downsize and reduce its debt.

Evergrande’s problems are exacerbated by the Chinese government’s efforts to de-risk the property sector. Beijing is seeking to reduce leverage among property developers and bring rapidly rising house prices under control through a “three red lines” policy, which limits borrowing across debt-to-cash, net debt-to-equity and debt-to-assets. 

Goldman Sachs analysts noted a broad sell-off in Chinese property stocks over recent weeks, with an average 15 per cent share price fall across the sector since June, pushing companies to decade-low valuations in terms of their price-to-book ratios.

The sell-off has stemmed from policy and credit tightening by Beijing, which has included higher mortgage rates as well as closer scrutiny of unsecured, short-term debt.

The flow of bad news regarding Evergrande have also been “exacerbating market concerns on overall industry liquidity conditions”, the bank’s analysts said.