Since the authorities in China announced their three red lines for developers last year, it has been clear that Beijing is determined to control runaway property prices and ensure developers do not take on more debt than they can swallow. Reining in lending to real estate helps funnel funds to more productive areas of the economy. No one is in doubt that this is important to the long-term health of China's economy, the world's second-largest. Many developers responded by trimming debt, including China Evergrande Group, the world's most indebted real estate firm. Even so, the company still has some US$89 billion (S$120 billion) debt, a further US$300 billion of liabilities - and has warned it may not be able to pay all of it.
This is worrisome. China Evergrande is not the first mainland China corporation to have difficulty repaying debt. Indeed, there have been a slew of defaults in the first half of the year, amounting, by some estimates, to 116 billion yuan (S$24 billion). The full-year figure could surpass last year's 187 billion yuan, which was a record. Even so, Evergrande has special importance in China. With some 700 projects running across 223 cities and an estimated three million or more jobs indirectly and directly connected to its fortunes, the company is, in some ways, critical to China. A major default or collapse could reverberate across the economy, affect banks and non-bank financial institutions that lent to it - and have an impact beyond China's borders. The best-case scenario is a soft landing for the firm, where it restructures its debt and bond holders get back at least a portion of what they are owed.