A growing number of Chinese real estate developers say they cannot pay their debts, raising fears of financial contagion as struggling real estate 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, who said Monday they likely would not be able to repay a $ 250 million bond to the due date of October 18.
Evergrande, the world’s most indebted real estate developer, is officially set to default on October 23, when the grace period ends for its first missed bond payment. The company missed a third round of payments on Tuesday, bondholders confirmed to Reuters, escalating investor nervousness.
Fears of an Evergrande collapse have caused Chinese property developers’ bonds to plummet, as investors pull their money to safer neighborhoods. The company’s problems made it more difficult for its peers to raise new funds or refinance, prompting some to announce that they could not meet their payments.
Modern Land, a Beijing-based real estate developer, on Monday asked investors to allow it to delay repayment of a $ 250 million bond for three months “to avoid any potential default.”
Shenzhen-based developer Fantasia Holdings Group last week failed to repay a $ 206 million bond, citing the effects of the pandemic, industry regulations and the economy.
The sum of debt defaults by Chinese real estate companies more than doubled this year, to $ 7.2 billion as of Sept. 27, from $ 2.8 billion a year earlier, according to real estate research center CRIC. .
The crisis rekindled memories of the Lehman Brothers collapse in 2008, which sparked a global financial crisis. So far, economists have played down the comparison, saying that while Beijing could let Evergrande and some other companies fail as a warning to others, the government is unlikely to allow widespread economic fallout.
“Its fallout seems largely manageable,” investment bank UBS said in a research note on Monday, saying Chinese authorities have indicated they will help limit the fallout.
In China, the distribution of blame has started. After allegations online that he was among the culprits, Ren Zeping, the company’s former chief economist, said he warned the company of its risks.
Ren wrote on the Chinese social media platform WeChat on Monday that shortly after joining Evergrande he called on the company to reduce its debt level and focus more, but he had received internal criticism from him. ‘other leaders.
“I had 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.
While the collapse of Evergrande is unlikely to snowball into a global financial crisis, it will be a blow to the Chinese economy due to the oversized role of the real estate sector. Other countries will feel the 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 debt represents about 2% of China’s gross domestic product. The real estate sector is the engine of about 25% of the Chinese economy, directly or indirectly, according to UBS.
The Evergrande crisis came at a time when Chinese leaders turned against the country’s corporate giants, clamping down on business titans, including Alibaba founder Jack Ma. The campaign has fueled uncertainty , because we do not know what pain Beijing will be ready to inflict to teach real estate developers a lesson, before intervening to limit the contagion.
Analysts say China is unlikely to bail out Evergrande, with UBS calling a restructuring of the company “inevitable.”
Information for this article was provided by Christian Shepherd and Alicia Chen of the Washington Post.