Struggles facing China's Evergrande not panicking markets

NEW YORK: Debt-crippled Chinese real estate giant Evergrande's troubles are being watched closely by foreign investors, but markets do not seem to fear a major contagion, at least so far. With a debt load of $300 billion, the threat of bankruptcy is real, especially as Evergrande hinted on Tuesday that it may not be able to pay its creditors.

However, IG France analyst Alexandre Baradez said "the market is not surprised as it may have been by Lehman Brothers," the American banking giant whose spectacular collapse in 2008 was the spark that ignited the global financial crisis.

"Lehman was a shock: a well-rated bank that disappeared overnight," Baradez told AFP. But with the Chinese firm "investors are preparing."

With a presence in more than 280 cities, Evergrande is one of the largest private companies in China and one of its leading real estate developers.

Crippled with debt, the firm saw its Hong Kong-listed shares collapse this year on mounting fears for its financial health.

The Chinese government seems determined to get control of the Evergrande situation, even if it means forcing the company to go out of business.

The question is how a possible debt default would be handled by Beijing.

"The chances of a disorderly default for Evergrande is probably not very high because of the social chaos that could ensue from consumers and lost life-savings," notes Omotunde Lawal, head of emerging markets corporate debt at investment management firm Barings.

Beijing would want to avoid that given "the overall emphasis on social and economic stability in China," she said.

Analysts instead expect to see a government-led restructuring that will pay off debts while maintaining certain business activities in order to limit losses.

The exposure of foreign clients also remains relatively minor: only about $7 billion of Evergrande's debt is held by non-Chinese investors.

Baradez said that "is not an amount that is impossible to absorb or likely to frighten" financial markets.

Even if the global financial system is likely safe from disruption, the company's struggles still could have repercussions beyond China. "It is possible that an American hedge fund has bought Evergrande debt and must sell other positions to hedge, which could cause a domino effect," Baradez cautioned.