Chinese real estate developer Evergrande did not pay $ 83.5 million in interest on a dollar-denominated bond on Thursday. This calls into question the fate of the business, if it fails to deliver the money within a 30-day grace period, before a formal default is declared.

Failure to meet payment will be an Asian company’s biggest default on dollar-denominated debt. Globally, Evergrande has a total of 1.97 trillion renminbi ($ 305 billion) in debt, including $ 20 billion in dollar-denominated bonds.

The company faces a new deadline on Wednesday, when a payment of $ 45 million on another bond becomes due.

Ahead of last Thursday’s deadline, Evergrande said he had arranged to pay interest on a renminbi-dominated bond, equivalent to $ 35.9 million, without specifying whether the payment was made in cash or in other assets. The declaration received the green light. When trading in the Hong Kong market on Friday, the company’s shares fell another 11.6%, bringing the decline for the year to 84% so far.

After significant drops last Monday in the wake of the Evergrande crisis, global stock markets appear to have ignored immediate fears that its demise could trigger a ‘Lehman moment’ for the global financial system, with Wall Street recording a rise for the week.

But there could be ripple effects in the future. Thu Ha Chow, senior financial analyst for Loomis Sayles in Singapore, told the Wall Street newspaper that Evergrande was a “managed and managed default” that did not surprise authorities or investors. “This is not a ‘Lehman moment’, but the market will be watching for any unintended consequences that result.”

However, longtime financial trader Jim Chanos told the Financial Time (FT) it could be worse than a Lehman situation because all real estate developers looked like Evergrande.

The main concern in financial circles is what the Evergrande crisis signals for the development of the Chinese economy. Based on the ever-increasing accumulation of debt, to finance massive real estate development, its business model has been described as a scaled-down version of the Chinese economy as a whole.

As an FT article said last week: “Evergrande, despite all the drama of the collapse, is but a symptom of a much bigger problem. China’s vast real estate sector, which contributes 29% of the country’s gross domestic product, is so oversized that it threatens to relinquish its role as the main engine of Chinese economic growth and, on the contrary, become a drag on it.

The expansion of real estate development has been such that, according to one estimate cited in the article, there are enough empty properties in China to provide housing for more than 90 million people.

The immediate cause of the Evergrande crisis was the Chinese government’s decision to significantly tighten credit regulations, instituting what are known as the “three red lines”. Evergrande failed out of all three, and the flow of credit, the basis of its operations, has dried up.

Chinese authorities instigated the new regime out of fears that the leveraged real estate market could become a threat to financial stability, with far-reaching economic and social consequences, such as those manifested in the Evergrande crisis. .

Last week on the Wall Street newspaper reported that Beijing had called on local governments to prepare for the fall of Evergrande. Officials had been instructed to “prepare for a possible storm” but were told to intervene only at the last minute if Evergrande’s efforts to avert the crisis failed.

Local governments have been urged to set up groups of accountants and that lawyers should be put in place to look at ways to get local state-owned property developers to take ownership of Evergrande projects.

Movements have already started in this direction. The FT reported that last Wednesday, in the southern city of Guangzhou, a subsidiary of Evergrande was asked to place its income in a state-controlled deposit account, so that “the interests of buyers can be protected and that construction of the project is continuing ”.

The Beijing directive called for the establishment of law enforcement teams to monitor public anger and so-called “mass incidents.” This follows protests from buyers, who have shelled out large sums of money for apartments they may never receive, as well as small investors who have invested in Evergrande.

An FT editorial highlighted two aspects of the crisis: economic and political. The real estate crisis, he noted, had the potential to trigger a chain reaction. “As developers’ sales plummet, they have less money to buy land, which squeezes the finances of local governments, which in turn are less able to invest in infrastructure. A real estate rout would therefore deactivate an engine that has propelled Chinese growth for at least two decades. “

He said there is a possibility of transforming China’s growth model, based on high-tech manufacturing and green technology development. But any transition would take place under very different conditions from the past. Between 2010 and 2019, growth averaged 7.68%, but it was now expected to decline significantly.

This meant that Chinese President Xi Jinping was working in a different environment than his predecessors, and “if poorly managed attempts to fix the real estate bubble lead to slower growth, Beijing risks not only fleeing investors, but losing. the support of its population ”.

According to a comment in the the Wall Street newspaper Last Wednesday, the conditions that produced the Evergrande crisis were by no means confined to China.

He said the question was not so much whether the shrapnel from the Evergrande explosion could be contained, due to China’s closed financial system. “The best question is whether similar explosives work in other developed economies. The answer is that there is probably some version of Evergrande in most of them. China’s dysfunctions are not as unique as foreigners believe.

The warning is not out of place. The massive injections of money into the global financial system, after the 2008 crisis, accelerating after the financial collapse of March 2020 at the start of the pandemic, helped generate an international real estate bubble.

Last week, the International Monetary Fund warned Australia, one of the countries where the bubble is most pronounced, that if left unchecked, a “correction in house prices” would pose a significant risk for economic stability.

In the past, the prescription of the IMF and the economic authorities would have been to increase interest rates. But such is the dependence of all major economies on the ultra-low interest rate regime, initiated by the world’s major central banks, that it is considered too dangerous. As Harald Finger, the IMF’s chief of mission, said during the presentation of the report: “Raising interest rates now would not be the right instrument that would jeopardize the broader recovery. “

In other words, the same problems that arose in China are present everywhere, but not in exactly the same form. Escalating real estate values, in a speculative bubble, threaten to trigger a financial crisis, but measures to try to prevent it can have major economic consequences.