Evergrande $300 billion collapse could have a domino effect

According to AllianceBernstein’s Jenny Zeng, the highly distressed Chinese real estate firms are on the verge of collapsing, with the nation’s highly indebted developer China Evergrande Group (HKG: 3333) almost defaulting. Zeng told CNBC’s “Street Signs Asia” there is the possibility of a “domino effect” following the collapse of Evergrande.

Evergrande is on the verge of defaulting as banks tighten lending

The co-head of Asia fixed income at AllianceBernstein said, “In the offshore dollar market, there is a considerable large portion of developers (who) are implied to be highly distressed.” She said that the developers are unlikely to survive longer as long as refinancing channels will continue being shut for extended periods. 

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Evergrande, the most indebted property developer globally, could collapse under a debt of over $300 billion and has warned on several occasions that it may default. Unfortunately, banks have been adamant about offering additional loans to buyers of Evergrande residential projects that are still unfinished, and rating agencies have frequently downgraded the company because of its liquidity problems.

Following guidelines from the Chinese government to reign over real estate enterprises’ borrowing rates, the financial position of other property developers suffered a knock as well. A cap on debt related to a company’s assets, cash flows, and capital are among the outlined measures.

Zeng explained when considering Evergrande on its own, the social and financial risks associated with the company are manageable. She quoted the Chinese property market’s fragmentation as the motive behind it.

Other struggling developers comprise 10-15% of the overall market

Although the struggling developers are individually small relative to Evergrande, they comprise around 10 to 15% of the overall market. Zeng warned a potential collapse could lead to systemic spillover to other sectors of the economy. She added:

“Once it starts, it takes much more from a policy perspective to stop it than to prevent it from happening.”

Zeng said:

“Despite Evergrande’s size – we all know it is the largest developer in China, probably the largest in the world – [it] still accounts for only 4% and now it’s even less of the total annual sales market. The debt, particularly the onshore debt, is well collateralized.”

According to some economists, the collapse could be the “Lehman moment” in China, in reference to the Lehman Brothers’ bankruptcy following the mortgage crisis that triggered the 2008 financial crisis.