Evergrande Crisis Shows Cracks in China’s Property Market

Angry home buyers are waiting on as many as 1.6 million apartments. Suppliers that sold cement, paint, rebar and copper pipes are owed more than $100 billion in payments. Employees who were strong-armed into lending are panicking now that the company cannot repay them on time.

China’s Evergrande Group, the embattled property developer whose towering debt has set off panic in global markets, is buckling under the weight of more than $300 billion in debt. The company’s billionaire chairman told employees on Tuesday that they would “walk out of darkness as soon as possible.”

But the question for many is whether the company can stumble out of its current crisis on its own without being led by Beijing. And experts are making increasingly grim predictions about Evergrande’s ability to hold on without a government bailout, and the consequences of a possible collapse.

A dire forecast about the company’s fate arrived on Tuesday for investors in Asia, this one from S&P Global Ratings. “We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy,” said the report, which was dated Monday.

Both the company’s shares and its bonds fell on Tuesday, though by more modest amounts than in recent days and weeks. Its shares closed 0.4 percent lower, and shares of other Chinese-focused developers that tumbled on Monday recovered some of their losses. Hong Kong’s Hang Seng Index, which fell 3.3 percent on Monday, ended the day with a 0.5 percent gain.

A disorderly collapse for a company of Evergrande’s size could have ripple effects in the world’s second-largest economy and beyond, including scaring off investors who have bet billions of dollars on the company’s success. A panic may also damage China’s property market, a huge source of the country’s growth but increasingly prone to heavy borrowing and erratic home prices.

“The officials still have some tools at their disposal to calm down the panic,” said Zhiwu Chen, a professor of finance at the University of Hong Kong, who predicted that the authorities would break up the company and sell its parts piecemeal. “They are under a lot of pressure to announce something soon.”

For decades, China’s property market seemed to have no limits. Developers like Evergrande built cities from dirt, created jobs, gave the middle class something to pour their savings into and enriched local governments who sold them land. Along the way, it created economic growth that stunned the world. Now, prices have become too high and Beijing is trying to slow things down.

It is also trying to send a message that no company is too big to fail.

The possible default of a giant like Evergrande has put the vulnerability of China’s housing sector in stark relief. If the company were to fail, some experts say, it could cause panic across the property sector.

Evergrande has warned it is under tremendous pressure and has hired restructuring experts to help determine its future. It has an $80 million interest payment on Thursday that it is likely to miss, which would cause more market turmoil.

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While market observers once took as a given that Beijing would step in at the first sign of distress, rating agencies, banks and investors have all factored in a possible Evergrande default. Many now predict that Beijing will not intervene until other property developers begin to fail and pose a collective risk to the broader financial system.

Beijing has the tools to stop a financial disaster and keep a lid on the social discontent brewing around Evergrande. Its censors have already taken down dozens of videos of protesters who crowded company offices in cities like Hefei and Shenzhen last week. Its police have warned employees who tried to get the attention of local officials to lay off.

But it is Beijing’s authority over the country’s banks and biggest financial institutions that provides its greatest power. The government can force panicked creditors to cool off, and order banks to give Evergrande the cash it needs to carry on or to take over parts of the business.

Yet the longer authorities wait to bail out Evergrande, the more likely other developers will suffer as investors begin to question their assumptions about the broader sector.

Just like Evergrande, other Chinese property developers have huge debt piles and are being forced by regulators to pay them off under the “three red lines” rules that aim to limit the banking system’s exposure to property.

More broadly, the property market is starting to slow and industry practices that helped to juice sales and keep developers afloat — like preselling properties before they are completed — are coming into question. Regulators in at least two provinces announced new rules to crack down on illegal practices, including delays in delivering properties, misleading advertising or practices to manipulate prices.

The Hong Kong-listed shares of China’s other major developers have become the target of investor angst in recent days, as China’s stock market is on holiday. Sinic Holdings, a much smaller real estate developer, lost 87 percent of its value on Monday before its stock was halted.

“The question is, how badly do they want to teach someone a lesson and how willing are they to have other people suffer because of that?” said Travis Lundy, an independent investment analyst based in Hong Kong.

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