Three Red Lines is turning into a bloodbath for China’s formerly largest developer, Evergrande. Yesterday:
- 2025 bond fell to nearly half its value.
- Equity is now less than 10% of enterprise value, down 12% in the past week.
- It has emerged that the charming firm has been drawing down upon funds held in escrow from apartment buyers. Funds that are supposed to be retained for the build lest the developer gets in trouble.
- The Chinese city of Shaoyang has halted sales at two of Evergrande’s residential projects in response.
The bloodbath is deep across the sector:
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If the unwind of the daisy chains of liabilities underpinning this behemoth accelerates then it is too big to fail. Authorities will step in.
In the meantime, the Three Red Lines mean ongoing discharge of assets, floats and fire sales. This has already hit starts in H1:
And will likely continue to do so through H2.
It is one reason why I remain bearish on iron ore demand as the year deepens.