Evergrande default risk prompts talk of broad contagion

By Tom Westbrook and Andrew Galbraith

China Evergrande is teetering between a messy meltdown with far-reaching impacts, a managed collapse or the less likely prospect of a bailout by Beijing for what was once the country’s top-selling property developer.

Founded in Guangzhou in 1996, Evergrande has epitomised China’s freewheeling era of borrowing and building, but with liabilities of nearly two trillion yuan (€262bn) its possible collapse looms as one of China’s largest for years.

Debt and land-buying curbs and hundreds of new rules have been imposed on Chinese developers over recent years as part of a push to cut financial risks and promote affordable housing.

Evergrande, which accelerated efforts to cut its debts in 2020 after regulators introduced caps, does not have any major offshore bond maturities until early next year, but tardy payment of suppliers and interest on loans have brought to a head concerns.

Now, without access to fresh funding, Evergrande cannot pay suppliers, finish projects or raise income, prompting it to hire advisors and warn of default risk. This, along with a buyout, break-up or bailout are the scenarios now being evaluated.

And while analysts have played down comparisons with the 2008 collapse of US investment bank Lehman Brothers, which caused crises at counterparties and ultimately seized up global markets, some investors have similar contagion concerns.

“If, as expected, Evergrande is defaulting on its debt and goes through a restructuring, I don’t see why it would be contained,” Michel Lowy of banking and asset management firm SC Lowy, which focuses on distressed and high-yield debt, said. “There are other developers that are suffering from the same problem of no access to liquidity and have extended themselves too much,” Mr Lowy added.

Other worries include the exposure of banks and the determination of regulators to press on with property market reforms despite hints of damaging consequences.

Reaction has so far concentrated in the bond market and on Evergrande’s stock, as well as the stocks and bonds of other developers such as, among others, Guangzhou R&F Properties Co and Xinyuan Real Estate Co.

Evergrande shares are down about 90pc in 14 months, while its dollar bonds are trading at 60-70pc below par.

“Stress is mounting for the most obvious grey rhino in China, namely the real estate sector,” Natixis economist Alicia Garcia Herrero said.

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