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Evergrande has long symbolized China’s sprawling and distressed property sector.
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Evergrande has filed for bankruptcy protection in the U.S. nearly two years after its descent into distress triggered a crisis across China’s property sector. More risks, beyond developers, are brewing in the world’s second-largest economy.
Evergrande filed for Chapter 15 bankruptcy protection in Manhattan on Thursday – a symbol of China’s sprawling and indebted real estate industry—which some estimates have put at 30% of the country’s gross domestic product (GDP). Chapter 15 protects foreign companies like Evergrande, whose corporate debt was widely held among Western institutional investors, under the umbrella of U.S. bankruptcy law.
Evergrande’s meltdown, starting in September 2021 when it failed to make interest payments on bonds, shook global markets and triggered a series of failures across the Chinese property sector. Evergrande reported an 812 billion Chinese yuan ($111.4 billion) loss for 2021 and 2022, and the company’s restructuring, largely managed by the state, has been in progress for a long time.
“The Company noted relevant media reports and wants to clarify that the Company is progressing with its offshore debt restructuring as planned,” said Evergrande’s board in a statement. “The application is a normal procedure for the offshore debt restructuring and does not involve a bankruptcy petition.”
Evergrande’s U.S. bankruptcy protection filing is not surprising, but it comes at a time when global investors are concerned about the debt crisis in China’s real estate sector. The troubles faced by property giants, including the largest survivor, Country Garden (ticker: 2007.H.K.), threaten to spill over into the wider financial system and coincide with a slowdown in the world’s second-largest economy.
Country Garden recently missed interest payments on some corporate debt, warned of significant losses, and halted trading on several mainland Chinese bonds, which is cause for concern. The woes of Country Garden have brought Chinese real estate back into the spotlight for investors, adding pressure to the stock market and exacerbating declines for the Dow Jones Industrial Average and S&P 500.
“The impact of Country Garden’s troubles is unlikely to be as severe as the fallout from Evergrande’s default two years ago. However, with the economy in worse shape now than it was then, even a smaller hit could be destabilizing,” noted Julian Evans-Pritchard, the head of China economics at research group Capital Economics, in a note.
Furthermore, the troubles at Country Garden and other developers are increasingly becoming a risk to China’s financial system, including opaque shadow banking entities that extended credit to the real estate industry. Units of Zhongzhi Enterprise Group, one of China’s largest asset managers, reportedly missed interest payments last week, as reported by Reuters, and informed investors that it is facing a liquidity crisis and must restructure its debt.
“[Zhonghzi] acknowledged that it was in a liquidity crisis and took the first steps toward a restructuring. This highlights the growing pressure on non-bank financial institutions (NBFIs), many of which are suffering from losses on their investments in the property sector,” said Evans-Pritchard. While “shadow banks are getting squeezed,” the economist added, “they aren’t as big a systemic threat as some fear.”
Nevertheless, with Hong Kong’s Hang Seng Index now in a bear market and the S&P 500 set for a third straight week of declines—largely due to China fears—investors will have to work hard to shake off their worries.
Write to Jack Denton at [email protected]
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