Chinese property giant Evergande, considered one of the top five risks to the stability of the US economy in a poll of market players by the Federal Reserve, made $148 million in interest payments which were due on Wednesday, avoiding an imminent default.
Evergande has been one of the great beneficiaries of the growth of Chinese cities the last twenty years, making its CEO founder Xu Jiayin, the wealthiest person in Asia in 2017. The company owns more than 1300 projects in approximately 280 cities. Its growth has been fueled by $300 billion in debt, just as the Chinese government has started cracking down on financial risk through its “three red lines” policy.
This policy was created by Chinese regulators to restrict the allowable annual growth in debt. If a company breaches none of the lines it has an allowable annual growth in debt of 15%, of it breaches only one of the lines it has an allowable growth in debt of 10%, if it breaches two of the lines 5% and if it breaches all three of the lines it cannot take on any more debt.
According to sources cites by CNBC Evergrande has crossed all three red lines since the announcement of the policy in August 2020 putting the conglomerate in a bad light with Chinese regulators, as well as making it difficult for the company to roll over debt by further borrowing.
Evergrande has approximately $8 billion in debt obligations due in the course of the next year, according to CNN, and $195.9 billion of property under construction. The company’s stock on the Hong Kong stock exchange has declined 85% over the past year.