The Daily Update: Evergrande Teeters

China’s Evergrande Group is never out of the news at the moment. The company’s struggles have been widely reported over the last few weeks as it comes to terms with servicing its mountain of debt, which was not made any easier after China cracked down on the property sector recently.

The company is in the red to the tune of USD300bn making it the world’s most indebted real estate developer. There are mounting concerns that if it defaults on its debt, it could be disastrous for China’s property market and send shock waves through the world’s second-biggest economy.

According to Bloomberg, there are reports that the real estate developer may not be able to make the interest payments on some of its liabilities next week and could also miss a principal payment on at least one of its loans.

Protests have started to take place at Evergrande Group offices across China as the developer falls further behind on promises to more than 70,000 investors. Construction of unfinished properties with enough floor space to cover three-fourths of Manhattan has ground to a halt, leaving more than a million homebuyers in limbo.

Added to this there are now reports that employee salaries are not being paid. The company employs nearly 163,000 directly, however this is the tip of the iceberg, as indirectly there are 3.8 million jobs generated by the company. According to its website, Evergrande currently has 1,300 real estate projects in 280 cities in China.

It has been a perfect storm for the company. Not only has the value of new home sales fallen 20% since the start of the year, but also the value of land sales, which along with Beijing’s tougher regulations on the property developer’s debt have made it tougher for the company to raise cash with even selling at big discounts.

The pressure on the company increased after Fitch cut its credit rating on Evergrande to CC, reflecting its view that ‘a default of some kind appears probable’. ‘We believe credit risk is high given tight liquidity, declining contracted sales, pressure to address delayed payments to suppliers and contractors, and limited progress on asset disposals,” said a Fitch Ratings statement. The move came a day after Moody’s slashed its rating, indicating it is “likely in, or very near, default”. All of the company's US dollar denominated debt is currently trading below 30 cents to the dollar.

Eyes are turning towards the Chinese government to see if it will step in and shore up the company.. Authorities in Guangdong have already rejected at least one bailout request from the firm’s founder, Bloomberg reported.

Overnight, in an editorial in the state-backed Chinese newspaper Global Times, the editor-in-chief warned the property giant that it should not bet on a government bailout on the assumption that it is ‘too big to fail’. It noted that Evergrande's potential bankruptcy was unlikely to trigger a systemic financial storm (i.e. Lehman Brothers) because it was a real estate business not a bank and downpayment ratios on property in China were very high.

However, allowing Evergrande to fail could have ripple effects throughout China, and the rest of the world. For a country that prizes stability and control, maybe that would be a step too far.

Have a great weekend.