China Evergrande Group, the embattled property developer, is the first high-profile real-estate company to run into serious trouble in Beijing’s campaign to tame a roaring property market. It might not be the last.
As China enters what many economists say is the final stage of one of the largest real-estate booms in history, it is confronting a staggering bill: More than $5 trillion in debt that developers took on when times were good, according to economists at Nomura Holdings Inc.
That debt is nearly double what it was at the end of 2016 and is more than the entire economic output of Japan, the world’s third-largest economy, last year.
Global markets are braced for a possible wave of defaults, with warning signs flashing over the debt of about two-fifths of development companies that have borrowed from international bond investors.
Chinese leaders are getting serious about addressing the debt, with a series of moves meant to curb excessive borrowing. But doing so without torpedoing the property market, crippling more developers and derailing the country’s economy is quickly turning into one of the biggest economic challenges Chinese leaders have faced in years, and one that could reverberate globally if mismanaged.
Luxury developer Fantasia Holdings Group Co. failed to repay $206 million in dollar bonds that matured Oct. 4. In late September, Evergrande, which has more than $300 billion in obligations, missed two interest-payment deadlines for bonds.
Asia’s junk-bond markets suffered a wave of selling last week. On Friday, bonds from 24 of the 59 Chinese development companies in an ICE BofA index of Asian corporate dollar bonds were trading at yields of above 20%, levels that indicate high risk of default.
Some prospective home buyers are balking, forcing the companies to cut prices to raise cash, and potentially accelerating their slide if the trend continues.