Contagion and Credibility

Markets are reacting to the growing pressure on Evergrande, as prices of other property developers’ bonds and equities have declined sharply this week. Beijing’s policy decisions in response to the market turmoil are critical to determine the path ahead. Allowing Evergrande to default on loans and bond payments would likely produce a broader credit crunch for other developers, and would accelerate pressure on property sales and prices. Moreover, local governments may be incentivized to default on debt from their financing vehicles in order to pressure Beijing into providing assistance as market turmoil intensifies.

Posted September 16, 2021
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