A version of this article was first published on FinanceAsia.

Following China Evergrande Group’s admission that it is teetering near bankruptcy, more Chinese property developers are expected to default in the next six to 12 months, according to S&P Global Ratings.

Offshore bondholders of China Evergrande Group reportedly did not receive coupon payments by Monday (December 6), the end of a 30-day grace period. If the group fails to make the $82.5 million in interest payments, the developer would have its first offshore default on a public bond.

Evergrande is currently known to be the world’s most indebted property developer, owing approximately US$300 billion of debt, including US$20 billion of offshore bonds.

“We expect defaults for Chinese developers to increase over the next six to 12 months” said S&P Global Ratings' report on November 18.  The report noted the firm’s recent downgrade of seven Chinese developers to the 'CCC' level or below,  adding, “we believe there is a default scenario for them.”

The report detailed the investor outlook on Chinese property developers as being “unusually negative”. In a poll conducted by the ratings agency, 91 per cent of respondents expected more China developer defaults over the next six to 12 months.

Of these, 48 per cent detailed an expectation of default across Chinese developers to increase in 2022, 28 per cent noted the likelihood of a “small number” of defaults, and 15 per cent felt that “we are nowhere near the end of the tunnel”.

On December 3, Evergrande confessed that it might not have enough funds to meet its financial obligations. The Hong Kong-listed firm noted receipt of a demand to perform its obligation as a guarantor of $260 million in debt. The company warned its own failure to do so could “lead to creditors demanding acceleration of payment”.

In a vicious cycle, if creditors demand accelerated repayment which Evergrande cannot meet, they will be able to launch bankruptcy proceedings against the company.

DMSA Deutsche Markt Screening Agentur, a German corporate information provider, announced its plans over coming days to file bankruptcy proceedings against Evergrande in the Grand Court of the Cayman Islands, where the developer is domiciled.

In a post on his LinkedIn profile on December 3, Marco Metzler, a senior analyst and senior advisor at the firm, stated, “we are vindicated by this official statement (of Evergrande). We have still not received the interest on our bonds (by Evergrande).”

However, it may be that the ruling Chinese authorities rather than a court in Cayman Islands, ultimately decide the fate of Shenzhen-headquartered Evergrande, which holds most of its assets in China. The same evening, the provincial government of Guangdong called upon the company’s chairman, Hui Ka Yan (Xu Jiayin), for immediate talks.

The Guangdong government’s announcement portrayed Hui as desperate for its help, saying,
“at the request of Evergrande, in order to mitigate risks, protect the interests of all parties and maintain social stability, the Guangdong provincial government has sent a working group to Evergrande to supervise mitigation, strengthen internal controls and maintain the normal operations of the company.”

The People’s Bank of China (PBOC) expressed its support to the Guangdong body in its attempt to oversee the firm’s ongoings.

Metzler followed the development by posting a photograph of Yan alongside the caption, “Bankruptcy knocking at the door…”

China’s central bank, the PBOC, has hinted that it will likely leave Evergrande’s offshore bond holders to market forces. The PBOC said, “the risks that arose in Evergrande were mainly due to its poor operations and blind expansion. The offshore US dollar bond market is highly market-driven with rather strong discernment, and has clear rules and procedures in handling such matters.”

The central bank added that it will maintain communication with regulators based in other jurisdictions to resolve the problems of bonds. The PBOC will facilitate Chinese companies in making interest payments or buying back their bonds, it said.

A Fitch Ratings report on September 28 estimated that holders of Evergrande’s offshore senior unsecured notes are likely to get back zero to ten per cent of their principal and interest.

Are Evergrande’s risks manageable?

The Guangdong government’s takeover of Evergrande fulfils the prediction of Andrew Collier in a report by Global Source Partners, a US macroeconomic research firm, on October 6.

In it, Collier, a managing director of Orient Capital Research, said, “Beijing plans to force the local governments to resolve debt issues locally. This passes the responsibility from the centre to the periphery. The Politburo’s attitude is that the provinces have benefited from the success of companies like Evergrande, so it is up to them to solve it. This absolves the centre’s financial responsibility.”

He added that the geographic diversity of Evergrande’s debt solutions is likely to prevent a system-wide catastrophe. “If Beijing can spread the damage out among a variety of regions, then the prospects for contagion are minimised. Why is this important? Xi Jinping and the Politburo’s main concerns are social stability and the primacy of the Party. A financial crisis would undermine the Party’s legitimacy. Causing small amounts of economic pain in a number of provinces would not.”

Chinese financial regulators have so far played down the contagion risks of Evergrande, saying they are manageable.

The PBOC reiterated this sentiment, saying, “the short-term risks of individual property companies will not affect the financial capabilities of the markets in the medium to long term. Recently, domestic property sales, land purchases and financing are gradually returning to normal, (and) some Chinese property companies are starting to buy back their offshore bonds.”

On Friday (December 3) the China Banking and Insurance Regulatory Commission (CBIRC) responded to a reporter’s question about Evergrande being unable to fulfil its overseas obligations, saying that this was on an individual case basis. With one third of Evergrande’s debt being related to the financial sector and such holdings being diversified, the CBIRC said, “this will not have any negative effect on the normal operations of our nation’s banking and insurance sectors.”

Similarly, a note by the China Securities Regulatory Commission (CSRC) stated, “currently, our nation’s property sector is maintaining a healthy development and most property companies are sticking to their core business with stable operations...The default rates of the bond markets on (Chinese) exchanges are maintained at the low level of 1 percent.” The contagion effect of Evergrande can be controlled, the securities watchdog added.

But others do not share the optimism of the Chinese regulators. The US Federal Reserve’s financial stability report released on November 8 warned that financial stresses in China’s real estate sector could have possible spillovers to the US and the rest of the world.

Other Chinese property developers listed on the Hong Kong bourse have also admitted to debt woes. 

On December 6, Sunshine 100 China Holdings announced default on $170 million of offshore bonds listed on the Singapore Exchange (SXE), which were due on December 5. In another announcement on the same day, Sunshine 100 said this default will trigger defaults of more debt, including $219.6 million of senior green notes due in 2022 which are listed on the Hong Kong Stock Exchange (HKEX) and $120 million of senior notes due 2023, which are listed in Singapore.

On December 3, Kaisa Group warned it may not be able to meet its repayment obligations on its $400 million 6.5 percent senior notes.

On December 2, China Aoyuan Group said it failed to honour its obligations of $651.2 million of debt principal owed to various creditors.