As Evergrande collapse looms, other Chinese developers warn of default

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 Chinese real estate developers to raise new funds or refinance, prompting some to announce they cannot meet their payments.

Several Chinese real estate developers have warned of defaults on bonds in recent days, including Modern Land and Sinic Holdings, which said Monday it would likely be unable to make payments on $250 million worth of bonds.

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 fail as a warning to other Chinese companies, 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 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.

Though 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 7.2 percent from 9.2 percent, citing uncertainty over the Evergrande crisis, as well as energy shortages.

Evergrande’s $305 billion in debt is around 2 percent 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 a string of 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 Beijing is unlikely to bail out Evergrande, with UBS calling a restructuring of the company “inevitable.”

Christian Shepherd and Alicia Chen in Taipei contributed to this report.