China’s debt-ridden property giant, Evergrande Group on Tuesday said its property sales will likely plunge significantly in September 2021. It issued a statement saying its cashflows were under “tremendous pressure” and that it could default on its debt.

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Evergrande used to be China’s largest property developer. But now it is laden with debts, and its efforts to ease the liquidity crunch are not yielding results. The company has warned of a loan default if it fails to sell assets fast enough.

Already Chinese regulators and financial markets are worried any crisis could ripple through its banking system, Reuters reported.

The company has been trying to raise funds by selling assets, but the “ongoing negative media reports” have “dampened the confidence of potential property purchasers,” it said in an exchange statement.

September is a month when real estate companies seasonally record high contract sales, the company said. But its sales – that have been dropping since June – will plunge this month.

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The developer had issued a similar warning two weeks ago. It had warned of default risks and legal action from creditors as it scrambles to raise funds to service its debt worth $305 billion.

The real estate sector in China is suffering ever since China tightened its leash on the sector. It outlined rules to rein in borrowing costs of developers. The rules impose debt and land-buying curbs and hundreds of new rules on developers over the recent years. The government was aiming to cut financial risk and promote affordable housing in the country.

But these measures ended up placing a cap on debt with respect to the firm’s cash flows, assets, and capital levels. And ever since then, Evergrande has been struggling with rising debt. And the experts are not surprised.

“When we look at China, this is one chapter in a series of regulatory tightening efforts. So far from this perspective, this is not new,” Manpreet Gill of Standard Chartered Bank told CNBC-TV18.

But this policy pressure, whether on the real estate sector or any other sector is unlikely to go away soon, Gill said. “Clearly these measures are affecting some broader policy priorities beyond financial markets. But from contagion risk alone we are keeping a tight eye. And one should always keep a close watch,” Gill said.

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Should we be worried about it?

Do we need to be worried about this though? Gill said, “From a sector perspective, whether you look at China’s property class or Asian high yield as an asset class, on average, we have actually seen credit quality improving on those specific set of metrics and not getting worse.”

The shares of the company plunged over 10 percent after the reports. Its stock has plummeted nearly 90 percent this year. But whether this is something to be worried about depends on the context, Gill said. It could be worrisome or creating an opportunity, he said, “in Asia dollar credit, we think it is creating an opportunity.”

When you are looking at China, there is a broader concern about policy and regulatory tightening, he said. “I think it goes beyond one firm and goes beyond just China property as a sector,” he said.

China has, in the past, cracked down on the tech giants, the education sector, cryptocurrencies, ride-hailing firms, and the gaming sector. “So, from that perspective, there are periods of regulatory tightening in the past. They have rarely stopped over a short period of time, these things tend to persist,” he said.

But before considering buying on dips or signs of equity markets bottoming, we need to see more than this, he said.

“I think the real opportunity is for investors who can access the offshore dollar bond market. Their valuations have become considerably more inexpensive,” Gill added.

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(Edited by : Yashi Gupta)