With more than $US300 billion of liabilities,$US669 million of which is due before the end of this year ($US615 million of it in dollar bonds),no cash,and with the majority of its assets apartments (most of them unfinished) within a Chinese property market that is oversupplied and where prices are falling,the group appears doomed unless the state intervenes.

If Evergrande falls,the flow-on effects would be severe.

For several years the Chinese authorities have been trying to orchestrate a controlled deflation of a massive property bubble by reducing developers’ access to credit and imposing controls on their leverage. They’ve also used interest rates,rationing of credit for buyers,rent controls and suspension of stated-owned property sales to dampen demand for property.

They may,however,have gone too hard,too fast.

The sheer scale of Evergrande’s liabilities,the exposures of banks,shadow banks,suppliers and the individuals who have pre-paid for apartments that may never be completed,could by itself create destructive ripples throughout the economy. It could also create contagion within the entire sector.

Evergrande’s struggles to stay afloat may not provide the Lehman moment that tipped the world into financial crisis. The authorities are unlikely to allow that to happen.

Evergrande might be the biggest of the troubled developers,but it isn’t alone and,with close to $US5 trillion of liabilities and $US20 billion of offshore bonds on issue,the sector – and China’s financial system more generally -- is vulnerable to a loss of confidence in the ability of its companies to service and repay their debts.

It is that potential for shockwaves to flow through China’s financial system and economy that has unsettled international investors.

In the past,they would have counted on Beijing to bail them out but the new and unpredictable policies Xi Jinping has been implementing this year,which have demonstrated a lack of concern about the massive investor losses in the tech sector,and signals from the authorities that they want to end the moral hazard associated with state bailouts of even state-owned or controlled entities,mean that is no longer a given.

More likely,if there is to be an intervention,it will be an outcome where Beijing oversees a controlled liquidation of Evergrande to protect its economy,banks and,to some degree,its more deserving citizens. Bond investors will have to incur the full consequences of their risk miscalculations.

Even that would have wider adverse implications for the markets in Chinese and other Asian-issued bonds and other securities. An Evergrande collapse,whether controlled or not,will have major spill-over effects both within China and within international markets.

It’s already having an impact on commodity markets,particularly the price of iron ore. The big driver of global demand for steel and therefore for iron ore is China’s property market.

The authorities’ efforts to deflate their property bubble and the directive that steel mills should cap their output this year at last year’s levels (partly for environmental reasons) was,after the mills’ lifted production 12 per cent above 2020 levels in the first half of the year,always going to make for a torrid second half for the mills and their suppliers.

Evergrande and the impact of its struggle to survive on the rest of China’s property sector – a sector that accounts for an estimated 20 per cent of the global demand for steel -- has combined with the cap on steel output to accelerate the decline in the iron ore price. From around $US220 a tonne in July it has plunged below $US100 a tonne this week.

Evergrande’s struggles to stay afloat may not provide the Lehman moment that tipped the world into financial crisis. The authorities are unlikely to allow that to happen.

But in a world made vulnerable by the pandemic and by sky-high valuations of financial assets it does,however,have the potential to help puncture asset bubbles both within China and elsewhere. It’s not just China that has a vital interest in Evergrande’s fate.

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