Evergrande collapse: US Secretary of State warns of 'profound ramifications' of company's downfall

U.S. Secretary of State Antony Blinken assessed the Evergrande fiasco, warning the company's downfall could affect the whole world. Photo / AP

US Secretary of State Antony Blinken has given an alarming assessment of the Evergrande fiasco, warning the company's downfall could affect "literally the entire world".

The Chinese property juggernaut – which is now the most indebted real estate firm on the planet, owing around A$408 billion – continues to teeter on the brink of collapse.

In the earlier days of the Evergrande crisis, financial insiders feared it could be China's "Lehman moment", a reference to the 2008 GFC.

There were serious concerns it could cause a credit crunch and have a contagion effect, spilling over into other companies and sectors.

This week, there were signs those fears could be realised, with another Chinese property company, Fantasia, also missing a payment on a US$206 million ($291 million) bond that had matured the day before, triggering a default.

And in an extraordinary interview with Bloomberg this week, Blinken urged China to act "responsibly" when it came to managing the escalating disaster, suggesting the company's collapse could affect us all.

'Profound effects'

In his provocative interview on Wednesday with Bloomberg Television, Blinken issued a direct plea to China.

Evergrande headquarters in Shenzhen, China. Photo / AP

"China has to make sovereign economic decisions for itself, but we also know that what China does economically is going to have profound ramifications, profound effects, on literally the entire world because all of our economies are so intertwined," Blinken said.

"So certainly when it comes to something that could have a major impact on the Chinese economy we look to China to act responsibly and to deal effectively with any challenges."

In all seriousness, now I am concerned. Why Blinken is commenting on this is beyond me unless there is something we don't know. Say what you will about the Secretary, he has never spoken wildly and always been rather restrained in his choices of words. https://t.co/aYqZf24OlZ

— Evergrande Turnaround CEO Balding 大老板 (@BaldingsWorld) October 6, 2021

Blinken's controversial warning immediately sent shockwaves through the finance world, causing some to speculate there may be more to the story than most were aware of.

However, his comments also attracted a degree of criticism, with respected research firm China Beige Book claiming on Twitter his warning "comes off as clueless and disconnected".

Regardless of the interpretation, Blinken's interview marks the first time a senior Biden administration official has weighed into the debacle, indicating the growing, global sense of unease surrounding Beijing's handling of it.

Evergrande sued

Meanwhile, Evergrande was dealt a fresh blow this week after two Hong Kong property agencies moved to sue the company over unpaid commissions.

There are signs Evergrande may have already caused a contagion. Photo / AP

According to Reuters, a recently revealed court filing reveals Centaline hopes to recover A$546,854 ($565,867) from Evergrande, while Midland Holdings is claiming the unpaid commission of A$7.6 million for two Hong Kong developments.

'Severe downside'

In an analysis published by the South China Morning Post, Tommy Wu, a lead economist at Oxford Economics, outlined what could happen in an Evergrande worst-case scenario.

"In a more severe downside scenario in which the housing market turns sour quickly, or if the financial and economic fallout of Evergrande's restructuring intensifies, a sharp economic slowdown would cause housing demand to fall precipitously," Wu writes.

"Property developers' financing costs would spike and funding could dry up.

"The government would probably take more significant steps to adjust its overall policy stance on property and more generally to limit the impact on overall economic growth."

Throughout the entire saga, Australia has been particularly invested, given our reliance on China when it comes to iron ore.

And now, experts are all but convinced we will be particularly affected no matter what the outcome of the Evergrande situation, given China's real estate industry is unlikely to experience another boom any time soon.