Evergrande Stress Tests China’s Property Ecosystem

Evergrande’s liquidity crunch crystalized as coupon deadlines passed and suppliers faced delayed payments, reflecting years of aggressive land banking and shadow credit. Offshore dollar bonds gapped lower, while equity in developers and property services sold off amid uncertainty on pre‑sold units and project completions. Interbank sentiment softened despite continued system liquidity.

Authorities signaled a preference for stability over blanket bailouts, calibrating support via targeted liquidity, project escrow safeguards, and guidance to prioritize home delivery. Spillovers hit contractors, local government financing vehicles, and trust products. The onshore‑offshore divide widened as policy support favored domestic stakeholders and system stability objectives.

We trimmed China HY property credit and reduced exposure to developers with opaque pre‑sale liabilities. We concentrated holdings in stronger SOEs, high‑quality banks with conservative provisioning, and select materials names that benefit from infrastructure backstops. We also increased tail hedges on China equity baskets pending clearer restructuring paths and sales recovery data.

In client portfolios, we kept EM duration neutral, added commodity hedges via copper and iron ore options, and shifted China equity exposure toward A‑shares with policy alignment. We maintained flexibility to scale back into credit once restructuring progress, escrow release metrics, and contracted sales stabilized on a sustained basis.