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collapse could have domino effect on China properties


The Evergrande Group or Evergrande Real Estate Group logo of a Chinese real estate company is seen on a smartphone and a PC screen.

AllianceBernstein’s Jenny Zeng warns that China’s most indebted developers are putting their real estate businesses at serious risk.| LightRocket | Getty Images

China’s “highly distressed” real estate companies are at risk of collapse as the country’s highly indebted developer Evergrande is on the brink of default, warns AllianceBernstein’s Jenny Zeng.

CNBC’s Street Signs Asia interviewed Jenny Zeng on Friday to discuss the possibility of Evergrande falling.

Zeng stated that there was a large number of offshore developers who are “implied to be very distressed” in the market for offshore dollars. Zeng said that such developers will “not survive any longer” if refinancing channels are closed for prolonged periods.

Evergrande, the world’s most indebted property developer, is crumbling under the weight of more than $300 billion of debt and warned more than once it could default. Banks have reportedly declined to extend new loans to buyers of uncompleted Evergrande residential projects, while ratings agencies have repeatedly downgraded the firm, citing its liquidity crunch.

Other Chinese property developers suffered financial losses due to the Chinese government’s rules for reducing the cost of borrowing. These measures include a limit on the amount of debt a company can take based on its cash flows, capital and assets.

Zeng stated that even though the number of struggling developers is small, when compared with Evergrande they account for 10%-15% to the market’s total market. A collapse could lead to a “systemic spillover” effect on other sectors of the economy, she warned.

It is more difficult from a policy perspective than it to stop it happening once it begins, she said.

A managed default, or worse yet, messy collapse of Evergrande on its own would not have much global effect beyond market turmoil.

Simon MacAdam

Senior Global Economist, Capital Economics

Taken on its own, the financial or social risks associated directly with Evergrande itself are actually “reasonably manageable,” Zeng explained. The fragmentation in the Chinese property market is a key reason for this, Zeng explained.

“Despite Evergrande’s size – we all know it is the largest developer in China, probably the largest in the world – [it] still accounts for only 4% and now it’s even less of the total annual sales market,” Zeng said. “The collateral is good for the debt and especially onshore.

China’s ‘Lehman moment’?

Some economists have warned that the collapse of Evergrande could become China’s “Lehman moment” – a reference to the bankruptcy of Lehman Brothers as a result of the subprime mortgage crisis, which triggered the 2008 global financial crisis.

Capital Economics’ Simon MacAdam called that story “widely off the mark.”

Read more about China from CNBC Pro

“On its own, a managed default or even messy collapse of Evergrande would have little global impact beyond some market turbulence,” MacAdam, a senior global economist at the firm, said in a Thursday note. We believe that even if the company were one of several property developers in China to fail, it wouldn’t take a major policy mistake for it to lead to a slowdown in China’s economy.

The shares of the Hong Kong-listed company have fallen more than 80% since Friday’s closing.

— CNBC’s Weizhen Tan contributed to this report.