China Evergrande Debt Default Hits Hong Kong Developers With Doozy While Chinese Big Tech Holds Firm

Turbulence in China’s property sector continued to weigh on shares in Hong Kong Tuesday after China Evergrande Group EGRNF missed another loan payment deadline and the company’s CEO was reportedly arrested by police.

After cancelling a scheduled meeting with creditors over its offshore bond repayments Monday morning, Evergrande said later in the day that its Hengdu Real Estate Group Co. Ltd. subsidiary would miss 4 billion yuan ($537 million) in principle and interest repayments on its three-year 5.8% interest bonds. Hengdu said it would enter into talks with creditors to delay the repayment date.

For its offshore debt, Evergrande had hoped to restructure $30 billion of bonds into convertible debt but was unable to satisfy Chinese regulators that it should be able to issue new debt as a result of the credit troubles at Hengdu. Specifically, the company said that the China Securities Regulatory Commission and the National Development and Reform Commission had vetoed a proposal by the company to offer offshore bondholders equity securities in Evergrande to replace the delinquent bonds as a result of an ongoing investigation into Hengdu.   

China’s largest financial daily Caixin reported that Xia Haijun and Pan Darong, the former chief executive and chief financial officer of Evergrande respectively, had been detained by police Monday as part of an investigation into the company’s present financial woes and into a scandal surrounding the group’s bank deposits which forced them to resign a year ago.

Shares in China Evergrand continued to fall 7%, while Monday’s biggest property faller, China Aoyuan Group Ltd., was 10% lower in Tuesday morning trading in Hong Kong.

Fears of Evergrande’s credit tumult spilling over into China’s Country Garden Holdings Ltd. CTRYF continued to weigh on China’s largest property developer after Country Gardens stated in its latest earnings report that it may have to default on existing debt.

Country Garden was down 3% in Tuesday morning trading, extending the previous day’s losses.

Junk dollar notes, Chinese property junk bonds, were flat Tuesday morning after tumbling sharply in recent days. Ping An Real Estate’s 2.75% 2024 note was the worst off Monday, down 7.2% by the end of the day.

Tech Strength Holding Out

While there is a squeeze among traditional real estate and finance companies, capital raising remains robust among China tech companies which were holding up Tuesday despite the rout in property stocks.

Search incumbent Baidu, Inc. BIDU was up 1% in morning trading while mobile tech Tencent Holdings Limited TCEHY was slightly lower after being hit 2% in the big sell-off among Hong Kong stocks Monday.

Alibaba Group Holding Limited BABA was 0.25% stronger on the day paring losses from Monday’s sell-off. The company’s stock spiked over 5% Friday when it announced a spin-off of its Cainiao Network Technology Ltd. subsidiary. Alibaba said it aims to eliminate the conglomerate discount its shares trade at and raise $1 billion by selling Cainiao in an IPO.

With Alibaba’s shares off 10% year-to-date some analysts are forecasting a new bull market in the Shenzhen-based tech giant’s stock going forward.

“A big chunk of the concern [for investors in Alibaba] has been the uncertainty towards the overall China macro. We are still seeing the macro situation still being a bit fluctuating month over month,” Macquarie analyst Ellie Jiang told CNBC recently.

“At the same time Baba is catching up the growth against the industry. So as long as Alibaba continues to offer that kind of growth against the industry this offers investors the foundation to rebuild a level of confidence into the stock.”

EV maker NIO NIO completed an additional $1 billion convertible debt financing Tuesday. In US markets, NIO shares suffered a temporary dip Monday morning on rumors that the company may need to raise an additional $3 billion of debt. The shares recovered after NIO issued a statement saying that other than the completed $1 billion convertible debt offering it “has no reportable capital raising activity, other than the recent convertible notes offering.” NIO ended the day down 2%.

While property markets and consumer stocks remain a concern for investors in Hong Kong and China, tech companies continue to raise increasing amounts of money in the property-led credit malaise. A lot of this has to do with the Chinese government’s mandate to ramp up funding and growth in the sector at a previously unprecedented pace, Templeton global investor Mark Mobius said in comments Monday on Fox Business.

Mobius elaborated that the bulk of China’s $41 billion in IPOs during 2023 were in tech stocks. “It appears that China wants to have more and more investment, but with a very, very specific goal, and that too in technology stocks,” he said.