Evergrande, a large property developer which operates in China, is struggling to cope with the limits placed on its borrowing, and the default has become likely. The collapse of Evergrande would be the biggest test of China’s financial system in years.

With the news covering the potential collapse, many financial markets saw significant selloffs at the start of September. However, following the Chinese authorities’ plans to save the creditors of Evergrande, the markets quickly began to recover.

Chinese authorities look likely to step in opting for an orderly restructuring rather than a bailout. This would most likely help affected homebuyers, leaving private creditors to face some costs.

While there would be both direct and indirect financial burdens for foreign investors, we do not believe it would create larger macro implications, with damages limited to c. $18Bn of foreign-currency bonds.

China’s banks should be capable of a total loan write-off and if the 2019 collapse of Baoshang bank is anything to go by, the People’s Bank of China (PBOC) would step in with more general liquidity support to see off any prolonged squeeze in financial conditions.

In spite of these concerns, the Shanghai Stock Exchange Composite (one of two main Chinese stock exchanges) rose c. 2% throughout September.