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Chinese real estate developers fretting about debt defaults

Evergrande misses another payment, reviving memories of 2008 fiscal crisis by The Washington Post | October 13, 2021 at 2:02 a.m.

A growing number of Chinese property developers are saying they can't pay their debts, raising concerns of financial contagion as troubled property developer Evergrande Group missed another interest payment to bondholders on Tuesday.

Several Chinese real estate developers have warned of defaults on bonds in recent days, including Modern Land and Sinic Holdings, which said Monday it probably would be unable to repay a $250 million bond by the Oct. 18 due date.

Evergrande, the world's most indebted property developer, is set to formally enter default on Oct. 23, when the grace period ends for its first missed bond payment. On Tuesday, the company missed a third round of payments, bondholders confirmed to Reuters, intensifying investor jitters.

Fears over an Evergrande collapse have caused Chinese property developers' bonds to slump, as investors pull their money to safer quarters. The company's troubles have made it harder for its peers to raise new funds or refinance, prompting some to announce they cannot meet their payments.

Modern Land, a Beijing-based property developer, asked investors on Monday to allow it to delay repayment of a $250 million bond for three months "to avoid any potential payment default."

Last week, Shenzhen-based developer Fantasia Holdings Group failed to pay back a $206 million bond, citing the effects of the pandemic, industry regulations and the economy.

The sum of Chinese real estate companies' bond defaults more than doubled this year, to $7.2 billion as of Sept. 27, from $2.8 billion a year earlier, according to property research center CRIC.

The crisis has revived memories of Lehman Brothers' collapse in 2008, which sparked a global financial crisis. Economists so far have played down the comparison, saying that while Beijing may let Evergrande and certain other companies fail as a warning to others, the government is unlikely to allow widespread economic fallout.

"Its spillover impact appears largely manageable," investment bank UBS said in a research note on Monday, saying there were signs from Chinese authorities that they would help limit the fallout.

In China, apportionment of blame has begun. After online allegations that he was among those at fault, Ren Zeping, the company's former chief economist, declared that he had warned the company about its risks.

Ren wrote on Chinese social media platform WeChat on Monday that not long after joining Evergrande, he had called for the company to reduce its level of debt and tighten its focus, but he had received internal criticism from other executives.

"I planned to make a difference, but I encountered a setback," he wrote. "It was a big blow to me."

Evergrande and Ren did not respond to requests for comment on Tuesday.

Although Evergrande's collapse is unlikely to snowball into a global financial crisis, it will be a blow to China's economy because of the outsized role of the real estate sector. Other countries will feel knock-on effects of an economic slowdown in China.

Last month, Goldman Sachs lowered its forecast for China's economic growth in 2021 to 7.8% from 8.2%, citing uncertainty over Evergrande, as well as energy shortages.

Evergrande's $305 billion in debt is around 2% of China's gross domestic product. The property sector drives about 25 percent of China's economy, directly or indirectly, according to UBS.

The Evergrande crisis has come at a time when China's leadership has turned against the country's corporate giants, cracking down on business titans including Alibaba founder Jack Ma. The campaign has fueled uncertainty, as it is unclear how much pain Beijing will be prepared to inflict to teach property developers a lesson, before it steps in to limit contagion.

Analysts say that China is unlikely to bail out Evergrande, with UBS calling a restructuring of the company "inevitable."

Information for this article was contributed by Christian Shepherd and Alicia Chen of The Washington Post.

Print Headline: Chinese real estate developers fretting about debt defaults

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