EVERGRANDE FAIL | Time is running out for China to sort out its real estate sector

In China, there are two categories of frightened borrowers. The first type has attractive assets, but it's unclear how much debt they're carrying. Consider Evergrande. The second has a lot of debt but no assets to back it up, but they do have political clout, which some hope will help them bail out the first.
To avoid harming the larger economy, China is considering loosening laws that would allow struggling real-estate developers to sell assets in order to avoid defaults. Even if Evergrande was willing to dump projects at fire-sale rates, the so-called "three red lines" on leverage ratios were so tight that there were no bidders for developers' property assets. In the future, regulators may allow white-knight developers to take over assets without the debt affecting their own leverage ratios, putting them at risk of crossing the three red lines. That would be reassuring. Because of the dangers lurking beneath, even the wealthiest real estate magnates may have second thoughts.
Every step in the fast-paced, high-leverage world of Chinese construction is an opportunity to sneak in secret debt. Developers frequently borrow money from trust firms to purchase land. They ask their own senior management and staff to purchase into these trust products in order to obtain transactions.
In dire circumstances, drastic methods are required. Evergrande, the world's most indebted developer, has sworn not to be bailed out by Beijing. However, since it made that pledge in mid-October, market circumstances have deteriorated. Even investment-grade developers like Country Garden Holdings have seen their bonds fall in value, indicating that the potential of contagion is genuine.
China must find a viable solution to its developer debt crisis. And the clock is ticking.

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