Angry Chinese investors occupied a conference room at China Evergrande's headquarters in Shenzhen in July 2021
  
After months of bad publicity for China Evergrande Group in Chinese social media, and reports of domestic investors' protests in multiple cities in China after Evergrande's non-payment of its wealth management products, finally came Fitch Rating's downgrade of China Evergrande to 'Restricted Default' on December 9. Any investor who counts on timely rating changes to make investment decisions will be disappointed by the slowness of the downgrade.  

In its December 9 statement, Fitch said “The downgrades reflect the non-payment of coupons due 6 November 2021 for Tianji’s USD645 million 13% bonds and USD590 million 13.75% bonds after the grace period lapsed on 6 December. The non-payment is consistent with an ‘RD’ rating, signifying the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a material financial obligation”.


S&P Global said “default looks inevitable for Evergrande” and in the coming days.  Moodys is even slower than Fitch Ratings and has not issued any statement with regard to China Evergrande yet. Such is the speed of issuing rating changes for the  “big 3” global ratings agencies. 


Better late than no action at all. The Fitch downgrade gives creditors a legal tool to force action upon the company by initiating bankruptcy proceedings.


Should Evergrande be liquidated in the event of a formal default, some analyst says creditors are unlikely to be paid much more than 5% of their claims. In that situation, creditors may have to deal with Guangdong government that is controlling China Evergrande Group, which means months if not years of negotiations and possible law suits. So do large creditors want insolvency?  


Mr. Hui Ka Yan made some efforts to pay back China Evergrande's international debt, including selling 2 private jets and mansions in Hong Kong and Los Angeles, along with the sale of subsidiaries. The proceeds from such sales are far from sufficient to cover even the bond interests coming due in December, not to mention those due in the next few months.  



According to Dr. Marco Metzler, a critic of Evergrande and the management its bonds has named five large global financial institutions that he says will be forced to write-off some $23 billion as a result of the Fitch downgrade. “Companies like BlackRock, Ashmore Group, Allianz, HSBC or UBS own the most bonds,” he says.


“It is also striking that although Chinese real estate giants have been in crisis for a long time, those funds bought additional securities even shortly before Evergrande’s insolvency. BlackRock’s portfolio, for example, saw a net addition of 31.3m shares in Evergrande bonds between January and August 2021. The fund holds 1% of its portfolio assets in Evergrande.


“Between January and July, HSBC increased its holdings in Evergrande bonds by a full 40%. The UBS Asian high-yield bond fund reduced its exposure to Evergrande by 0.09 percentage points, but the number of shares rose by 25% in May.


“Allianz Dynamic Asian High Yield Bond also had a higher weighting of Evergrande of 2.56% at the end of July.”


One conclusion is that these financial investors firmly but incorrectly believe that the debt of China Evergrande has implicit guarantee of the Chinese government. They believe the Chinese government will act rationally and not to hurt their image on the international financial bond market. The reality is that Xi's government is no rational government. 


The other conclusion is that these financial investors are either so badly informed or simply ignored the reports of protests of Chinese investors who demanded China Evergrande live up to its promises of financial products, some of which defaulted as early as June, 2021.