Hong Kong CNN Business  — 

It’s crunch time for China’s heavily-indebted Evergrande Group.

The sprawling Chinese real estate conglomerate faced a critical test on Thursday: could it meet its obligations to bondholders, or would it slip closer to the default it had warned might be coming?

Evergrande was due to pay $83.5 million worth of interest on a dollar-denominated bond, according to data from Refinitiv. It’s not clear whether the company made that payment, and it had not commented by the close of trading in Hong Kong.

Investors have already been rattled by the risk that one of China’s biggest developers could collapse, sending shockwaves through the world’s second biggest economy.

The company was also scheduled to pay interest on a yuan bond Thursday. It had already reached an agreement with bondholders on that payment, according to a stock exchange filing on Wednesday.

Following that announcement, Evergrande’s stock rebounded as much as 32% on Thursday, as the Hong Kong market reopened following a holiday. It ended the day up nearly 18%. The broader Hang Seng (HSI) Index closed up 1.2%, boosted by property and financial shares.

“The sentiment is a lot better after the news from yesterday,” said Julian Evans-Pritchard, senior China economist for Capital Economics. But the outlook for the offshore bond payment still remains “uncertain” and Evergrande is “a long way from resolving its problems,” he added.

“We will see Evergrande make more defaults. Even if it avoids defaulting today, the situation is not getting better, unless the government steps in,” Evans-Pritchard said.

Chinese Estates, the second largest shareholder of Evergrande and a long-time business ally of the company, said Thursday in a stock exchange filing that it has already sold Evergrande shares worth 246.5 million Hong Kong dollars ($31.7 million) in the past few weeks. The company may also sell its remaining shares, it added. Chinese Estates’ shares gained 5.5% in Hong Kong.

Even if Evergrande failed to make the $83.5 million bond payment on Thursday, it may still have some time. The company has a 30-day grace period before “officially defaulting,” wrote Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, in a research note this week.

But any missed deadline will fuel investor anxiety over the viability of the company.

Evergrande is stumbling under $300 billion worth of debt, which is widely held by Chinese financial institutions, retail investors, home buyers and its suppliers in construction, materials and design industries. Foreign investors also hold some of its debt. Over the past few weeks, the company warned investors twice that it could default if it’s unable to raise money quickly.

It’s not yet clear whether the company will actually default, or whether Beijing will intervene and orchestrate some type of restructuring to contain the fallout on the financial system and the broader Chinese economy.

Will Beijing bail Evergrande out?

Real estate accounts for more than 7% of the Chinese economy, according to official data. Some analysts estimate that the number could be much higher if other related industries, ranging from construction to materials suppliers, are included. According to researchers at Berenberg, real estate activities are estimated to account for as much as 29% of China’s GDP, and many believe the Chinese government will eventually intervene in some capacity, even if a full bailout is unlikely.

“We don’t expect government actions to help Evergrande unless systemic stability is at risk,” said S&P Global Ratings analysts in a research report earlier this week. “A government bailout would undermine the campaign to instill greater financial discipline in the property sector.”

Instead of a bailout, the analysts expected the government’s focus to be on guiding Evergrande through an orderly debt restructuring or bankruptcy process, while facilitating negotiations and funding to ensure small investors and home buyers are protected “as much as possible.”

Only if contagion from Evergrande were to cause other large developers to fail, would the government step in directly, they added. But they believe the hit to the financial system from Evergrande alone will still be “manageable.”

Macquarie Group’s economists, meanwhile, also don’t think a “wholesale bailout” of Evergrande is likely.

“The government would make sure that the pre-sold apartments get done and delivered to homebuyers,” they said, though they added that shareholders and lenders could “take a big loss.”

However, Beijing will be keen to avoid any escalation in protests mounted recently by investors and apartment owners, who gathered outside Evergrande’s headquarters in Shenzhen to demand their money back.

Longstanding concerns

Evergrande’s troubles have been brewing for a while. In recent years, debts ballooned as it borrowed to finance its various businesses, from housing and electric vehicles to sports and theme parks. Then, in August 2020, Beijing started reining in the property sector’s excessive borrowing in an attempt to prevent the housing market from overheating and to curb debt growth.

In the past few weeks, Evergrande’s liquidity crisis has intensified, triggering a further plunge in the company’s stocks and bonds.

The need to “soften the blow” for small investors will likely be the focus of any restructuring of Evergrande, according to Robert Carnell, head of research for Asia-Pacific at ING Economics.

He cited Chinese President Xi Jinping’s recent emphasis on “common prosperity” and a need to redistribute wealth in the interest of “social fairness.” That pledge has influenced Beijing’s sweeping crackdown on tech, finance, education and other sectors, as it blames the private sector for causing financial risks and exacerbating corruption and inequality.