The world’s most indebted property developer, China’s Evergrande Group, has officially defaulted on its international debt obligations, triggering a wave of panic selling across global financial markets. The company, which owes more than $300 billion to creditors, suppliers and homebuyers, failed to make interest payments on about $1.2 billion of bonds due on Monday12. Fitch Ratings, one of the major credit rating agencies, declared Evergrande in default on Thursday2, a move that could complicate the company’s restructuring efforts and expose its bondholders to significant losses.
Evergrande’s collapse has been widely seen as a test of China’s ability to manage the risks posed by its highly leveraged property sector, which accounts for about a quarter of the country’s GDP3. The Chinese government has been trying to rein in excessive borrowing by real estate developers since 2020, when it introduced new rules to limit their debt ratios4. However, the crackdown has also squeezed the cash flow of many developers, making it harder for them to repay their debts and complete their projects.
The crisis at Evergrande has raised fears of a domino effect that could spread to other developers and sectors of the Chinese economy, as well as spillover effects to the rest of the world. Evergrande is not only a major employer and taxpayer in China, but also a significant borrower and issuer of bonds in the global markets. According to Bloomberg, Evergrande has more than $19 billion of dollar-denominated bonds outstanding, held by a wide range of investors, including banks, hedge funds and asset managers5.
The default of Evergrande has already sent shockwaves through the global financial system, causing sharp declines in stock markets, commodities and currencies. The Dow Jones Industrial Average dropped more than 500 points on Thursday, while the S&P 500 and the Nasdaq Composite also fell sharply. The MSCI World Index, which tracks shares in 50 countries, suffered its worst day since May. Oil prices plunged more than 4%, while gold and silver prices also retreated. The US dollar strengthened against most major currencies, as investors sought safe-haven assets amid the uncertainty.
Analysts have warned that the situation could worsen if Evergrande fails to reach an agreement with its creditors and stakeholders, or if the Chinese government does not intervene to prevent a disorderly collapse. Some have compared the crisis to the 2008 collapse of Lehman Brothers, which triggered a global financial meltdown. However, others have argued that the comparison is exaggerated, as China has more control over its economy and financial system than the US did at that time.
The fate of Evergrande remains unclear, as the company has not provided any updates on its restructuring plans or negotiations with its creditors. The company has also been facing protests from angry homebuyers who have paid deposits for unfinished properties, as well as from employees and contractors who are owed wages and payments. The Chinese authorities have urged Evergrande to ensure social stability and protect the legitimate rights and interests of all parties involved. However, they have also signaled that they will not bail out the company or its investors indiscriminately.
The Evergrande crisis is expected to have lasting implications for China’s property sector and economy, as well as for the global financial markets. It could also pose challenges for China’s political leadership, which is preparing for a key meeting next month to set the agenda for the next five years. How Beijing handles the crisis will likely shape the future direction of China’s economic policy and its role in the world.