Morgan Stanley sees China restructuring troubled developer

(Sept 22): Beijing may initiate a managed debt restructuring of “a troubled property developer” in the coming week, followed by policy easing in October to contain spillover to the broader economy, according to Morgan Stanley economists.

“Regulators have had a mechanism to deal with defaults of property developers and reduce systemic risk,” economists including Robin Xing wrote in a note Tuesday. If these actions are delayed, there could be a one percentage point impact on China’s gross domestic product growth in the fourth quarter, warranting bigger stimulus in 2022, they added.

In one encouraging sign, China Evergrande Group’s onshore property unit said Wednesday that it has negotiated a plan with bondholders to pay interest due on its 5.8% 2025 domestic notes. While the world’s most indebted developer didn’t clarify the terms of the arrangement, its announcement helped cap losses in the broader equity market that reopened after a two-day holiday.

The benchmark CSI 300 Index was down 1.4% as of 10:22 a.m. in Shanghai, after dropping as much as 1.9%. Hong Kong is shut for a holiday.

Other Wall Street giants including Citigroup Inc. are expecting Beijing to stem any systemic risk arising from Evergrande, which missed interest payments due Monday to at least two of its largest bank creditors. Global risk assets slumped on that day.

Morgan Stanley in its base case expects there will be minimal impact on the two-year compound annual growth rate for China’s GDP, which could rebound to more than 5% in the fourth quarter from 4.7% in the previous one “with swift intervention and policy easing.

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