Bankruptcy in China?

 Edward Cheng:

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Evergrande is a behemoth of a property developer in China. It owns 1,300 projects in more than 280 cities and is China’s largest property developer by sales.

But it does a lot more than property development. Its business has expanded to include theme parks, electric vehicles, financial services, mineral water and it even owns a soccer team (Guangzhou Evergrande FC).

Evergrande is estimated to have an eye-watering $300 billion of debt and is now struggling to pay its creditors. On Sept. 23, Evergrande had $83.5 million in interest payments due on dollar-denominated bonds. The Wall Street Journal reported that investors did not receive the funds. Evergrande could be declared bankrupt if the interest payments aren’t met within 30 days of the due date.

The ratings agency Standard and Poor’s (S&P) has deemed an Evergrande default as “likely.” As investors lose faith in the solvency of the company, Evergrande’s share price has tumbled 80 percent year-to-date.

As the company scrambles to find funds, construction has stalled on its projects putting the future of the 1.4 million properties it committed to building in doubt. The situation has sparked protests at Evergrande headquarters in Shenzhen. Protestors included contractors owed money by Evergrande, and those who have paid for a home that may now never be delivered.

But the problem extends beyond the people Evergrande owes, and it could have far-reaching effects. Property plays a major role in China’s economy. It accounts for around 25 percent of gross domestic product and is also the single largest source of household assets (accounting for around 60 percent of household assets). Thus how Evergrande’s predicament unfolds could have major domestic and global consequences. A disorderly collapse of Evergrande could trigger a downward spiral in China’s property market, which could derail domestic and global growth, and bring about social unrest as citizens see their wealth evaporate.
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To say that Evergrande is over-leveraged is an understatement. It looks like more than a cash flow problem.  I suspect its assets may be overvalued and it would hame problems liquidating them.