Should that happen, the effects would be felt across the country's banking system. The group has also suspended work on some projects as it tries to conserve cash, a move that's poised to hit China's property sector.
Investors are clearly worried. Evergrande's shares in Hong Kong are off 72% this year. That's significantly worse than the 29% plunge suffered by Alibaba (BABA), which has been at the center of the Chinese government's efforts to rein in big tech firms. Hong Kong's Hang Seng index is off 4% year-to-date.
Evergrande's bonds are also under pressure, as is its electric vehicle business, which Bloomberg recently identified as the worst-performing stock in the world. The humongous debt in China's property sector has been a lingering risk to the country's financial system for some time. And Evergrande is one of China's most heavily indebted developers. It has $37 billion in borrowing due within one year.
Should Evergrande actually default, it would be another destabilizing jolt at an already tenuous moment for markets and the economy? A default would likely lead to tighter financing conditions for the entire real estate sector, hurting their businesses.
Though not guaranteed, Beijing would likely intervene to soften the blow, Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note to clients in July.
"China's leadership is presumably reluctant to offer a bailout to Evergrande, given the desire to punish reckless behavior by private entrepreneurs and discourage speculative property investment," he wrote.
"But given the firm's sheer size and systemic role, officials would step in to try to ensure an orderly restructuring in the event of a default." "Even if other developers avoid a similar fate, construction activity is likely to suffer as they are forced to pare back new projects," Evans-Pritchard said.
Why it matters: China's economy is stuttering due to its aggressive approach to constraining the Delta variant and supply chain woes. The Caixin index tracking the country's manufacturing sector, released Wednesday, fell to 49.2 in August, indicating the first contraction since April 2020.
Meanwhile, Chinese markets have plunged this year as authorities target tech, education, and other private enterprises, wiping $3 trillion off the market value of the country's biggest companies. A major default is the last thing China needs right now.
These are trying times for China the second biggest economy in the world. Its slowing economy, the disruptive crackdown on private businesses, speculations of potential de-listing of China stocks in the US, potential chains of corporate defaults, and other not too exciting developments are ranking the country high on global investors' watchlist. No one wants to be caught with the can again. Hopefully, there might be some bail-outs.