The Chinese real estate company is fading fast—here are some high-level observations for investors.

  • The default of Evergrande is essentially a given in light of deleveraging pressure, tightening liquidity from bank lines, weakening demand for property in China and the company’s fairly risky balance sheet management.
  • The size of the operations involving a host of suppliers, sub-contractors is causing knock-on effects on employment and payment.
  • Also, sizeable funding of construction activities through pre-sales puts prospective homeowners and their savings at risk, creating potential for social unrest.
  • The above suggests that government support in some shape or form will at least limit the fallout while securing a window for restructuring and changing ownership and/or management.
  • Spreads in the China property sector have been widening materially, at least in the weaker credits; in this context, long duration in China government bonds appears to be a safe harbour.

 

> Read our Insights article on Evergrande