Chinese company Evergrande has started to repay investors in its property in China management business with property, as the world’s most indebted real estate developer faces a key test this week.
Major banks have reportedly been told that they won’t receive interest payments on loans that are due Monday, while interest payments of $84m (£61m) on the firm’s bonds are also due on Thursday.
The company’s shares fell by 15% in Hong Kong trade on Monday.
The property giant’s deepening debt problems have triggered fears over the impact its potential collapse could have on China’s economy.
Evergrande grew to be one of China’s biggest property companies by borrowing more than $300bn (£217bn).
Last year, Beijing brought in new rules to control the amount owed by big real estate developers.
The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.
Now, it is struggling to meet the interest payments on its debts.
This uncertainty has seen Evergrande’s share price tumble by around 85% this year. Its bonds have also been downgraded by global credit rating agencies.
There are several reasons why Evergrande’s problems are serious.
Firstly, many people bought the property from Evergrande even before building work began. They have paid deposits and could potentially lose that money if it goes bust.
There are also companies that do business with Evergrande. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.
The third is the potential impact on China’s financial system.
“The financial fallout would be far-reaching. Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms,” the Economist Intelligence Unit’s (EIU) Mattie Bekink told the BBC.
If Evergrande defaults, banks and other lenders may be forced to lend less.
This could lead to what is known as a credit crunch when companies struggle to borrow money at affordable rates.
A credit crunch would be very bad news for the world’s second-largest economy, because companies that can’t borrow find it difficult to grow, and in some cases are unable to continue operating.
This may also unnerve foreign investors, who could see property in China as a less attractive place to put their money.
