China Evergrande: Caught in a Potentially Fatal Debt Spiral

By John Engle

China Evergrande Group (HKSE:03333Financial) has had a rough 2021 thus far. Down 45% since the start of the year, China’s largest property developer is now trading on bankruptcy fears.

Evergrande has seen its fortunes fade precipitously in recent weeks as long-standing fears about its extreme leverage and debt balance have come to fruition. Having struggled for years under an unsustainable — and ever-growing — debt burden, the company’s balance sheet appears at last to have been stretched to the breaking point.

All told, Evergrande’s debts are likely in excess of $300 billion. After several close calls in recent months, investors and state institutions alike seem to have lost faith the company’s ability to make good on its obligations, as Bloomberg discussed on July 19:

Things have only gotten worse over the past few days, thanks in no small part to the growing number of Evergrande’s lenders and counterparties who are no longer willing to give it the benefit of the doubt. As Bloomberg reported on July 21, Evergrande’s list of allies has become rather thin and a growing number of creditors and suppliers have begun to circle the wounded property developer.

Symptom of a systemic problem

Evergrande has skirted the edge of insolvency before, but the situation has never looked bleaker than it does now. Evergrande may have trouble wringing out a financial rescue package from a government that has shown even more reticence toward bailouts in recent months. As Bloomberg noted earlier this week, this new stance could prove problematic for the severely leveraged property developer:

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