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Chinese Developer Defaults Pile Up as Evergrande Contagion Spreads

www.wsj.com
6 min read
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The problem could worsen as a wave of debt from the beleaguered industry comes due in the coming months
HONG KONG—The pain is spreading in the market for Chinese junk bonds.

Dollar-bond defaults from Chinese property developers are rising quickly as the country's housing market slumps, and the problem could worsen as a wave of debt from the beleaguered industry comes due in the coming months.

Real-estate developers dominate China's international high-yield bond market, making up about 80% of its total $197 billion of debt outstanding, according to Goldman Sachs.

The market has already endured its worst selloff in a decade, after property giant China Evergrande Group EGRNF 7.41% skipped some interest payments to dollar bondholders in late September, and smaller rival Fantasia Holdings Group Co. surprised investors by defaulting on debt that matured in early October.

An Evergrande site in Lu'an, Anhui province, China, this month. Photo: Raul Ariano for The Wall Street Journal

Since then, at least four other Chinese developers have either defaulted or asked investors to wait longer for repayment. A 30-day grace period for Evergrande to pay international bondholders, meanwhile, runs out this weekend, and investors are expecting the company to default on close to $20 billion in outstanding dollar debt.

The average yield on an ICE BofA index of Chinese high-yield corporate bonds stood at 20.3% Wednesday, after topping 23% last week. At the height of the selloff on Oct. 13, the average price of bonds in the index had plunged 21% in just one month—its worst performance since October 2011.

"Global investors have been offloading high-yield bonds issued by Chinese developers because of the concerns that they have, rightly, about the future of those companies and their capability to repay debts," said Jing Sima, China strategist at BCA Research. "The lack of response from Chinese policy makers definitely adds to that concern," she added.

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Frances Yoon, Quentin Webb, Elaine Yu
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