For weeks, global markets have been watching the struggles of China Evergrande Group, a teetering real estate giant weighed down by US$300 billion or more in obligations that just barely seemed able to make its required payments to global investors. 3 days after a deadline passed leaving bondholders with nothing but silence from the company, a major credit ratings firm declared that Evergrande was in default. But instead of resolving questions about the fate of the Chinese behemoth, the announcement only deepened them. The firm, Fitch Ratings, said in its statement that it had placed the Chinese property developer in its "restricted default" category. The designation means Evergrande had formally defaulted but had not yet entered into any kind of bankruptcy filing, liquidation or other process that would stop its operations.
It is the nature of that next step - bankruptcy, a fire sale, or business as usual - that remains unknown. In the United States and many other places, bondholders could push an unwilling company into some form of reorganisation, usually in court, and divvy up the pieces. That may still happen. But Evergrande is faltering in China, where the Communist Party keeps a firm hand on corporate meltdowns to keep them from spreading out of control. With Evergrande, the risk is high: A sudden unwinding of the company could hit the country's financial system or, potentially, the many homeowners in China who have already paid for Evergrande apartments that are yet to be built.
The Politburo, China’s 25 most-senior political leaders, met on Monday and issued a communique that suggested there would be an easing of curbs on the real estate industry. That could help revive a market that saw home prices fall for the first time in six years in September, followed by an even bigger decline in October. Just as the deadline for Evergrande’s bond payments was ticking down late on Monday, China’s central bank announced it was cutting how much the country’s commercial lenders would have to set aside as reserves. By doing so, 1.2 trillion yuan, or about $190 billion, would be released into the economy.
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