China’s Evergrande Defaulted on its Debt – What Does That Mean for the US Economy?
China Evergrande, the Chinese property developer, has defaulted on its debt, according to Fitch Ratings.
On Thursday, Dec. 9, Fitch Ratings downgraded the company and its subsidiaries to “Restricted Default,” reflecting the non-payment of coupons due Nov. 6 after the grace period lapsed on Dec. 6.
Evergrande is a top-three Chinese property developer by contracted sales, headquartered in Shenzhen, which has a strong national presence, with 798 projects in 234 cities covering all of China’s 31 provinces and municipalities. The company also has businesses in electric vehicles, finance, healthcare and cultural tourism, according to Fitch. The group holds about $300 billion worth of debt and Fitch notes that there has been no announcement from the company or the trustee regarding the payments after the grace periods lapsed.
“In addition, the company did not respond to our request for confirmation on the coupon payments. We are therefore assuming they were not paid,” according to Fitch.
Peter Cohan, a lecturer at Babson College and author of “Goliath Strikes Back,” told GOBankingRates that Evergrande’s default will have no significant effect on the U.S. economy since it has only $20 billion in U.S. dollar bonds outstanding.
“As of 2021, the size of the bond market (total debt outstanding) is estimated to be at $119 trillion worldwide and $46 trillion for the US market — the Evergrande bonds are 0.04% of the U.S. total,” Cohan said. “Investors in those bonds will suffer losses but since the risk of Evergrande’s default has been high for a long time, those who invested in the bonds should be well-prepared for what is happening now. Even if those investors end up losing everything, the systemic impact will be tiny.”
Fears of default sent shares of Evergrande plummeting 20% on Monday. So far this year, the stock has lost 87%, CNN reports.
“The Chinese government will contain the damage but the regulatory crackdown will slow China growth next year,” Jay Hatfield, CEO at Infrastructure Capital Management told GOBankingRates.
In a filing on Dec. 3, Evergrande execs said a risk management committee would be set up and will be headed by the company’s chairman and founder Xu Jiayin.
“In view of the operational and financial challenges the Group is facing, the board of directors of the Company resolved to establish a Risk Management Committee of China Evergrande Group. The members of the Committee have diversified backgrounds which include certain senior management members of the Group; senior management members of certain leading enterprises; and professionals,” according to the filing.
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