Evergrande fiasco impact on Pakistan market

2021 marks significant regulatory changes in China under the banner of “Common Prosperity Initiative”, targeting companies in Tech space, Real estate, and Education. The negative near-term implications from such regulatory actions have become more visible lately with Evergrande calling for debt-restructuring facing a possible default threat.

Financial distress at Evergrande has brought jitters in Emerging Market bonds. Fortunately most of the impacts are limited to Chinese real estate bonds, where contagion from fall-out appears far-fetched. However, it compounded existing weakness precipitated by expected stimulus tapering by US Fed.

Beijing is due to host Winter Olympics in February 2022 in the back drop of expected climate curbs in the regions close to event sites — on a scale much larger than seen in 2008 Beijing Summer Olympics. Major industries which are likely to be impacted are: Steel and Aluminum producers, Refiners, and Coal miners.

From Pakistan’s vantage, volatility shall persist in EM bonds space in the near term, possibly resulting in local authorities realizing higher yields on planned up to US$1.5 billion Sukuk issuance in October 2021, to retire US$ one billion bond. That said, possible downward revision in certain commodities is materially positive for local steel players. For Cements, coal prices are likely to remain elevated in the near term. However, lack of future investments in coal power plants by China is material positive.

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