Please ensure Javascript is enabled for purposes of website accessibility

Why China Evergrande Group Stock Bounced 47% Today

By Rich Smith – Sep 22, 2021 at 11:35AM

Key Points

  • Shares of gigantic Chinese real estate developer Evergrande have lost 90% of their value over the last 14 months.
  • With more than $300 billion in debt, investors fear the company is heading toward insolvency.
  • A last-minute interest payment this week calmed nerves for a time -- but "the real test" for Evergrande comes tomorrow.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Evergrande pays some interest on a debt. Investors cheer.

What happened

Shares of Chinese property behemoth China Evergrande Group (EGRN.F -66.67%), as well as shares of the China Evergrande Group (EGRN.Y 16.67%) American depositary receipts, exploded higher in Wednesday morning trading, rising 40.1% and 47.5% respectively, through 10:25 a.m. EDT, and pulling up the share prices of other Chinese stocks in their wake. For-profit Chinese education company Gaotu Techedu for example -- which has problems of its own -- jumped 12.4%.

That's a big turnaround from the 31% China Evergrande stock was down, from Friday's close, on Tuesday. And an even bigger turnaround from the near-90% loss China Evergrande investors have endured over the past 14 months as fears of bankruptcy loomed. But why did it happen?

Person examines a stock chart superimposed on a Chinese flag.

Image source: Getty Images.

So what

A couple of factors seem to be working this morning to calm investors' panic over the prospect of China Evergrande going insolvent. For one thing, it might not be insolvent. As television network Euronews reports this morning, Evergrande subsidiary Hengda Real Estate Group has just informed the Shenzhen Stock Exchange that it has successfully negotiated a plan to pay interest on a bond due in 2025. Additionally, Bloomberg reports that Evergrande is prepared to make a 30.5 million euro interest payment on one of its own bonds.  

That's good news for investors in Evergrande, and in the Chinese stock market in general, in the short term. Longer-term risks still exist, of course, but in an article this morning, CNBC pooh-poohed the chance of Evergrande taking down the Chinese economy as a whole, pointing out that while Evergrande's debts are substantial (more than $300 billion), they make up only about 6.5% of total debt in the Chinese property sector.  

Worries about systemic risks from Evergrande, therefore, said ING head of research for the Asia Pacific region Rob Carnell, are "a bit overdone." While the company's debts are certainly large, CNBC points out that Evergrande does have physical assets (land and buildings) worth $220 billion. That's not enough to cover all the company's debts, admittedly, but in the event of insolvency, it should be enough to pay back investors a lot more than the $0.25 on the dollar that the company's bonds are currently selling for -- especially if the Chinese government steps in to buy back some of Evergrande's properties.    

Now what

And yet, all of the above does seem to assume that insolvency is coming, and this crisis isn't over yet, as more and more interest payments come due.

As The Wall Street Journal observed this morning, "the real test" for Evergrande could arrive as early as tomorrow, when the company is supposed to pay an $83.5 million coupon on a dollar-denominated bond. Failure to pay that interest on time would start the clock on a 30-day grace period, giving Evergrande time to pull a rabbit out of the hat, but probably shaking investor confidence -- and Evergrande's stock price -- even further.  

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

China Evergrande Group Stock Quote
China Evergrande Group
$1.75 (16.67%) $0.25
Gaotu Techedu Inc. Stock Quote
Gaotu Techedu Inc.
$1.13 (6.60%) $0.07
$0.03 (-66.67%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.