Property development is undoubtedly a volatile, but crucial part of the global economy. Like many other countries, China provides this segment with large-scale funding through their banks, insurers, and bond funds. Evergrande, the second largest property developer in China, benefits from their financial aid. Unfortunately, property loans accounted for nearly 30% of total outstanding loans from Chinese financial institutions at the end of September 20201, of which Evergrande was also guilty of defaulting. The deadline to make an $83 million interest payment passed without any word from Evergrande about whether it had met its commitments.2
To protect financial institutions from property developers who cannot repay their loans, the Bank of China is closely monitoring all clients and doing urgent background checks. The assumption is that “not only Evergrande, but also some of the top leveraged developers are on edge of liquidity crash even insolvency,”1 putting financial institutions in a major bind.
Due to these circumstances, shares fell nearly 12% in September. This decrease in value also had ripple effects in overseas markets—many saw this as having potential spill-over effects.
In response, China is pumping billions of dollars of capital into the country’s banking system to promote confidence in their financial sector. The impact on institutions in the United States and Europe should be minimal.” 2
1 Tham, Engen. “Evergrande’s Problems Prompt China’s Banks, Insurers to Pull Back on New Credit.” Insurance Journal, 24 Sept. 2021, https://www.insurancejournal.com/news/international/2021/09/24/633655.htm.
2 Stevenson, Alexandra, et al. “Uncertainty Swirls around Evergrande as a Deadline Passes.” The New York Times, The New York Times, 23 Sept. 2021, https://www.nytimes.com/2021/09/23/business/china-evergrande-bond-payment.html.