• Chinese real estate developer Evergrande Group’s struggle to comply with financial limits that regulators imposed to curb rising debt levels has prompted fears a default might cause global shockwaves. 

• Evergrande is so deeply intertwined with China’s broader economy — from retail investors to infrastructure-related firms that are a gauge for global commodities demand — that fears over contagion have kept financial markets on tenterhooks.

• Economists say banks and bondholders are likely to lose money if Evergrande restructures its $310 billion debt but Beijing has the resources to prevent a Chinese credit crunch.

• Evergrande inches closer to a key deadline for an interest payment on a dollar bond, with financial markets tense even as investors and analysts played down the threat of its troubles becoming the country’s “Lehman moment”.

• Investors are watching how the developer headquartered in the southern city of Shenzhen near Hong Kong handles the interest payment this week.

• The real estate developer has announced that it will make an interest payment due this week. 

• The International Monetary Fund (IMF) believes Beijing has the tools to prevent the situation from turning into a systemic crisis.

Evergrande Group

• Evergrande Group is said to be China’s second-largest property developer by sales.

• Founded in 1996, it is one of China’s biggest builders of apartments, office towers and shopping malls and one of its biggest private sector conglomerates. 

• The company says it has more than 2 lakh employees and supports 3.8 million jobs in construction and other industries. Evergrande says it has 1,300 projects in 280 cities and assets worth $350 billion.

• Evergrande’s founder, Xu Jiayin, was China’s richest entrepreneur in 2017 with a net worth of $43 billion, according to the Hurun Report. He has tumbled down the list as Internet industries boomed but still ranked as China’s richest real estate developer last year. 

• Evergrande has branched out into electric vehicles, theme park development, health clinics, mineral water and other businesses.

• Xu built Evergrande on borrowed money, possibly even more so than rivals in an industry that depends on debt. As of June 30, Evergrande reported $310 billion of outstanding debts to bondholders, banks, construction contractors and other creditors.

New regulations by Chinese govt on debts

• Evergrande was caught out by new limits regulators imposed on real estate-related borrowing as part of the government’s campaign to reduce reliance on debt.

• Economists have been warning China’s rising debt is a potential threat for more than a decade. The ruling Communist Party has made reducing such financial risks a priority since 2018. But total corporate, government and household borrowing rose to nearly 300 per cent of economic output last year from 270 per cent in 2018. 

• The Communist Party has cracked down on debt as it tries to nurture self-sustaining economic growth based on domestic consumption instead of trade and debt-supported investment.

• Hundreds of smaller developers have shut down since regulators in 2017 started tightening control over fundraising tactics such as selling apartments before construction begins.

Will it be China’s “Lehman moment”?

• Chinese residential real estate is regarded as posing little risk to the financial system. Most apartments are paid for with cash, not mortgages. That makes a wave of defaults like those in the United States after the 2008 crisis unlikely and easier for banks to manage.

• Given how bloated China’s property developers are, there could be a whole wave of defaults around the corner, but Beijing has resources to prevent a full-blown Chinese credit crunch. 

• For all its flaws, this is one advantage of having a tightly controlled financial system versus a more free-market system.

• Some commentators suggest Evergrande might become China’s “Lehman moment”, referring to the failure of Wall Street bank Lehman Brothers, a forerunner to the 2008 crisis. But economists say the risk of wider financial market contagion is low.

• Lehman Brothers had filed for bankruptcy on September 15, 2008, which further led to the subprime mortgage crisis in the US. It was a trigger for the global financial crisis.

• Evergrande has $18 billion of outstanding foreign-currency bonds, but much of that is held by Chinese banks and other institutions. Unlike Lehman, whose assets were financial instruments whose prices can swing wildly, Evergrande has $215 billion of land and partially completed projects with relatively stable prices.

• IMF chief economist Gita Gopinath said the real estate sector was a big part of China’s economy, and Evergrande’s potential default could have implications for China's economic activity and financial stability. IMF believes that China has the tools and the policy space to prevent this turning into a systemic crisis.

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