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Commentary: Evergrande woes could spread to Southeast Asia property markets and construction suppliers

While financial risks are contained, the worry is if Evergrande and other property developers coming under strain default on Southeast Asian suppliers and overseas developments, says Coface’s Bernard Aw.

Commentary: Evergrande woes could spread to Southeast Asia property markets and construction suppliers

A man walks past the China Evergrande Centre in the Wan Chai district of Hong Kong on Aug 6, 2021. (Photo: AFP/Isaac Lawrence)

SINGAPORE: The liquidity crisis of Evergrande commands global attention because the size of its liabilities not only dwarfs the cash the Chinese property developer has on hand but also amounts to about 2 per cent of China’s GDP.

Concerns over financial stability amid a backdrop of growing debt, rising land prices and brimming sales led Chinese authorities to cool the property market over the past year.

Last August, the Chinese government introduced three financial metrics to improve the financial health of property developers and cool lending to those failing three so-called “red lines”.

Evergrande and a number of other developers did not pass muster for all three, while over 40 crossed at least one red line.


Could an Evergrande default pose a systemic risk to the Chinese banking sector? Such a risk is unlikely for several reasons.

First, Evergrande’s borrowings, which amounted to 571.8 billion yuan (US$89 billion) as of end-June, hardly constitutes half a per cent of China’s total yuan loans of 186.7 trillion yuan as of August.

Second, the latest stress test on Chinese banks, conducted by the Peoples’ Bank of China partly to ascertain the fallout of a property loan crisis, indicates that the banking system can not only withstand such a shock but has also strengthened over the past year.

Only three of 30 large and medium banks are expected to fail under a severe stress scenario, down from nine from last year.

In the most severe stress scenario where non-performing loans in property development rise by 15 percentage points and mortgages rise by 10 percentage points, China’s over 4,000 banks still have ample available capital. At an average capital adequacy ratio that drops to 12.3 per cent if this happens, banks should have sufficient cushion to stomach a reasonable amount of losses.

Third, banks have been cutting their exposure to property loans since last year, according to JP Morgan.


The bigger worry business investors should have is the broadening of Evergrande’s troubles to China’s real estate sector that could impact both Chinese property developments abroad and foreign investments in the industry.

Although Evergrande has no known projects in Southeast Asia, other Chinese developers black-listed by Chinese authorities have expanded into Southeast Asia in recent years.

China Fortune Land Development (CFLD), the first major Chinese developer to fall victim to the “three red line” policy and defaulted on US$3.6 billion worth of bonds so far this year, has been involved in many major Indonesian projects since 2015.

Guangzhou R&F properties, which has housing projects in Malaysia, including the Princess Cove luxury condominiums in Johor Bahru, is under increasing funding stress after being downgraded by Moody’s and has begun disposing assets last year to boost liquidity.

Country Garden, China’s largest property developer by sales, flagged for violating one of the three red lines, has two projects in Malaysia and three projects in Indonesia as of June 2020.

In Singapore, four of the largest Chinese developers in the republic – Logan, QingJian, Kingsford and CSC Land Group – have invested over S$8 billion for land bids though none have violated any red lines.

The poor conditions and tightening public policy on Chinese real estate have already began to affect ASEAN investors in China’s property market.

In what was Singapore developer City Developments first full-year loss since the 1970s, the firm reported a S$1.78 billion write-down on its investment in China-based Sincere Property Group, and subsequently sold its stake to avoid getting drawn into its bankruptcy woes.


A sharp slowdown in the Chinese property market will have also implications for trade and economic growth.

Evergrande’s trade and other payables rose by 15 per cent from December to a record 951.1 billion yuan in August, alongside news reports of late payments to suppliers.

There are worrying signs of a broader trend when ultra-long overdue payments (more than 180 days late) accounting for over 10 per cent of annual turnover in the construction sector doubled to 67 per cent in 2020, signalling heightened credit risks, according to trade credit insurer Coface’s annual China Corporate Payment Survey published in May.

A sharp deterioration in the Chinese housing sector could weigh on specific Southeast Asia producers of construction and building materials, as well as manufacturers of electrical machinery that supply Chinese property developers and spell trouble for their credit positions.

China accounts for 25 per cent of demand for Indonesia’s metal and wood exports and imports over a quarter of Thailand’s plastics and rubber products. It also imports 20 per cent of Vietnam’s machinery and electrical shipments and 14 per cent of Malaysia’s.

Security personnel march to their duty outside the Evergrande headquarters in Shenzhen, China, Friday, Sept. 24, 2021.(AP Photo/Ng Han Guan)


The other concern is the prospect of an outsized impact on the Chinese economy, following a significant slowdown in the housing sector and its knock-on effect on trading partners.

The real estate market is an important contributor to China’s growth, with related activities contributing to 29 per cent of the economy. Adjacent sectors such as construction and manufacturers of machinery and equipment could also be hit.

Household consumption may be severely affected if home prices fall dramatically, as real estate accounts for 70 per cent of household wealth.

These weak macroeconomic conditions in China could spill over to Southeast Asia through a slowdown in trade.

Southeast Asia became China’s largest trading partner in 2020, overtaking the European Union. Despite global merchandise trade shrinking due to the pandemic, bilateral trade between China and ASEAN rose by 7.0 per cent from 2019 to US$731.9 billion at the expense of China’s trade with its other major trading partners. 

Coface estimates that every percentage point drop in China’s GDP growth rate will see a half-a-percentage point decrease in ASEAN’s GDP growth rate.

Among ASEAN member states, Singapore may be the most affected by China’s slowdown in the ASEAN region, followed by Thailand and Malaysia, primarily due to relatively greater trade flows between these countries and China.

The rapid rise of bilateral trade between Vietnam and China since 2015 also made the former increasingly vulnerable to decelerating Chinese growth.

With growing bilateral trade between China and ASEAN as well as the latter’s increasing role in the region’s cross-border production networks with China as the centre, any Chinese economic troubles will send reverberations through Southeast Asia.

This cannot come at a worse time where many countries in ASEAN remain locked in a battle with the COVID-19 pandemic.

Bernard Aw is Economist for Asia Pacific at Coface.

Source: CNA/cr