Marc Jones, Ross Kerber

LONDON/BOSTON – After narrowly avoiding collapsing, China Evergrande Group, world’s biggest developer, is now on the verge of collapse again. It remains unclear what investors will do if the problem continues.

Evergrande is the most prominent victim of China’s current property crisis. This year, it has more than 1,300 properties and has liabilities of over $300Billion.

Evergrande may still be able to pay the $82.5 million overdue bond payment, although it has already warned that it could not.

Logan Wright of Rhodium Group, the director of China markets research said that Evergrande’s disorderly default would accelerate property sector financial stress at a time where China is experiencing slowing sales.

A resolution should include billions in yuan due contractors and suppliers.

Wright explained that “Right now, there’s very little clarity about the possible sources of financing. Even if there is greater confidence that authorities can respond with some resolution in order to limit financial contagion,” Wright added.

Evergrande, which narrowly avoided China’s largest default by making 11-hour payments at end of grace period over the past few months, is back on the ledge.

However, unlike what happened a month ago, Evergrande’s fallout is contained within China. Investors believe that the impact of Evergrande’s woes will be more limited than it was a month ago.

Liqian Ren is a WisdomTree director and follows China. He expects Evergrande to default.

She pointed out Friday’s statement by the central bank and similar statements, that Evergrande was an issue of its own and would continue to provide long-term financing.

Contagion is when nobody understands who has what. And events happen quickly. Instead, Evergrande’s default would be more similar to the HNA Group restructuring case, approved by creditors in October.

Brandywine Global Investment Management manager Tracy Chen saw Evergrande’s wider risks as low.

“I think the systemic risk is very unlikely and regulators have been doing a decent job in making this what they call a ‘limited detonation’,” Chen said.

China’s central bank has pumped 1.2 trillion yuan ($188 billion) into the banking system, its second such move https://www.reuters.com/business/chinas-rrreminder-that-economies-remain-fragile-2021-07-09 since July, and the regional government where Evergrande is based has said it is now stepping in.

CONTAGION RISK

Sector experts in China are asking whether they can stop more contagion.

Evergrande has seen a number of its smaller counterparts go under since the October dodge. Kaisa in China, which was China’s first default on property in 2015 and has more than $3 billion in debt that it must refinance in the next year is also under serious pressure.

Himanshu Porwal from Seaport Global said that “generally speaking, nothing has changed” (since October’s Evergrande deadline), but that the market mood had changed. He cited the series of smaller defaults.

Although it was good that Evergrande had asked for provincial involvement, he stated, no state-owned property firm participated in Evergrande’s liquidity crisis projects. (Graphic: Fitch China proper and land sales, https://fingfx.thomsonreuters.com/gfx/mkt/akvezomgdpr/Fitch%20China%20proper%20and%20land%20sales.PNG)

Meanwhile, there is still much to be done inside of the country.

China’s real-estate HY bonds are experiencing their worst year yet, losing over a third on average. Evergrande and Kaisa have lost more than half their value, while defaulters such Fantasia are at least 80%.

JPMorgan (NYSE) has already recorded 11 defaults in this year’s total. With land sales down over 55% and housing sales falling 25% each October, it is likely that more will be.

The Chinese government believes Beijing should be more direct in its support.

Frank Pan from Asia Corporate Research said that to stop contagion spreading up the credit curve regulators should think about stabilising both financial and physical demand.

“The worry is that regulators may fail to stop large-scale defaults in the sector. This could lead to more bonds trading at distressed rates,” adding that “better quality” firms might find it difficult to refinance. (Graphic: Evergrande would be second biggest EM corporate default Evergrande would be second biggest EM corporate default, https://graphics.reuters.com/EMERGING-DEFAULTS/movanjdlrpa/chart.png)

(Additional reporting and graphics by Karin Strohecker, Svea Autumn-Bayliss & Rodrigo Campos; editing by Stephen Coates