Evergrande Crisis: The cash crunch at Evergrande Group is a long-term issue for China but won’t trigger a contagion for India and the rest of Asia, according to James Sullivan.
“The Evergrande crisis is not a company-specific issue, it’s a structural issues that will impact the Chinese property base for a significant period of time,” the head of Asia Pacific equity research at JPMorgan told BloombergQuint’s Niraj Shah in an interview.
China today, according to Sullivan, is a system that is overleveraged and facing a decline in incremental housing requirements. “So the property sector, which has been a significant contributor to GDP and economic growth, is going to be structurally slow,” he said. “Combined with high leverage in the system, we have a workout ahead of us.”
A large part of the debt that Evergrande carries currently, however, was held onshore. Hence, a contagion across regional markets seems highly unlikely, Sullivan said.
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Evergrande is facing mounting protests by homebuyers, retail investors and even its own employees as they demand repayments on overdue wealth management products. The uproar follows the group’s proposal to impose lengthy repayment delays on holders of high-yield WMPs, the lightly regulated investment vehicles that have become a key source of funding for the developer. S&P Global Ratings has warned that the distressed developer is likely to default if doesn’t get support from Chinese government. That sent its shares down.
A complete liquidation of Evergrande, according to Sullivan, is something that the Chinese government probably cannot afford. The company’s prominence in the property and development market and the number of Chinese citizens involved, he said, could be a rationale for its restructuring rather than a complete seize up.
The most likely scenario ahead, Sullivan said, is an orderly restructuring of parts of the company’s portfolio. “Offshore investors will clearly have to take a haircut. Bonds have also priced the debt in, they’ve been trading at 20 cents to the dollar. There will also be onshore losses. But this would limit the contagion across the rest of the region.”
Sullivan, however, doesn’t expect the crisis to cause any direct impact on commodity costs or the steel rally.
India View
Sullivan is upbeat on Indian equities, undeterred by their expensive valuations. There, however, is a base case for tapering in November and a possibility of four rate hikes in the next year, which could make investors extremely selective about most markets, he said.
But the increased risk in Chinese markets and its government’s crackdown on technology companies are driving investor interest to peers in India and Indonesia. The contrast in government support in India compared to China, he said, is also working well for investors. That’s made Sullivan bullish on India’s tech and financial stocks.
