debt crisis, bond default and investor risks

Chinese property giant Evergrande is on the brink of collapse, and analysts warn the potential fallout could have far-reaching implications that spill outside China’s borders.

“Evergrande’s collapse would be the biggest test that China’s financial system has faced in years,” says Mark Williams, chief Asia economist at Capital Economics.

Here’s how bad its problems are, and what’s in store for investors.

After expanding rapidly for years and snapping up assets as China’s economy boomed, Evergrande is now snowed under a crushing debt of $300 billion.

The world’s most indebted property developer has been scrambling to pay its suppliers, and warned investors twice in as many weeks that it could default on its debts.

On Tuesday, Evergrande said its property sales will likely continue to drop significantly in September after declining for months, making its cash flow situation even more dire.

The Chinese developer is so huge that the fallout from a potential failure could hurt not only the Chinese economy, but spread to markets beyond.

Banks have also responded to its deteriorating cash flow. Some in Hong Kong, including HSBC and Standard Chartered, have declined to extend new loans to buyers of two uncompleted Evergrande residential projects, said Reuters.

Ratings agencies have repeatedly downgraded the firm, citing its liquidity problems. Evergrande’s problems intensified last year when China introduced rules to rein in the borrowing costs of developers. Those measures place a cap on debt in relation to a firm’s cash flows, assets and capital levels.

Its share price plunged nearly 80% so far this year, and trading of its bonds was repeatedly halted by Chinese stock exchanges in the past weeks.

Evergrande is everywhere. Its main business is in real estate, and it’s China’s second-largest property developer by sales.

• Evergrande owns more than 1,300 real estate projects in over 280 cities in China.
• Its property services management arm is involved in nearly 2,800 projects across more than 310 cities in China.
• The company has seven units dabbling in a wide range of industries, including electric vehicles, health-care services, consumer products, video and television production units and even a theme park.
• The firm says it has 200,000 employees, but indirectly creates more than 3.8 million jobs every year, according to its website.
• Evergrande’s shares and bonds are included in indexes across Asia.

The pool of affected parties include banks, suppliers, home-buyers and investors.

Evergrande warned this week its escalating troubles could lead to broader default risks.

It…