The Endless Cleanup at China’s Most Indebted Property Developer

Dogs bark, horses neigh, and investors worry about the financial health of China’s most leveraged property developer. The pattern is almost uncannily routine, but the latest drama at China Evergrande Group still bears watching.

The most recent wobble relates to the company’s relationship with Shengjing Bank, a regional lender in which it began buying a stake five years ago. Mainland Chinese media reports suggested that regulators are examining the bank’s transactions with Evergrande. Last week Chinese regulators warned that some small and midsize banks had exploited restrained property lending by their larger peers to expand their own exposure.

The company said on Monday that its financial links with Shengjing Bank were legally sound. Last week, Evergrande Chairman Hui Ka Yan promised to get on the good side of one of the government’s three red lines for property-developer leverage by the end of the month, doubling down on plans in the company’s last annual report.

Markets don’t seem entirely convinced that all is fine. On Friday, the yield on Evergrande’s dollar bonds maturing in March next year reached 19.8%. That is not anything like the near-30% levels of September last year, during the last panic about the company’s financial future, but it is up by more than 10 percentage points in the past two weeks.

For investors, Evergrande has been both a dream and a nightmare. The company’s stock is borderline uninvestable for bulls and bears alike, swayed regularly by buybacks and highly concentrated ownership. But its bonds, perpetually priced as if the company is at serious risk of collapse, have been enormously profitable for iron-stomached believers in the company’s political nous.

That doesn’t mean its frenetic business model won’t catch up with it eventually. Paying down some of its mountain of debt sounds like a good idea. So why hasn’t Evergrande done it before? The simple answer is that the company’s business model requires relentless growth and constant financing. Its compound revenue growth rate over the past decade is around 35% a year, outstripping that of U.S. tech giants like Apple and Amazon.

Paying off its debts is not a matter of simply trying harder; it needs to find money to do so. The most obvious route is to lean on less organized creditors instead of banks and bond investors. At the end of 2020, the company had over 1 trillion yuan (A$201 billion) in trade payables and contract liabilities, owed to suppliers and home buyers respectively, up almost 20% from a year earlier. The contract liabilities figure is one to watch in particular.

Unless bearish investors think they have some specific political insight that has escaped even the sector’s insiders, there is no point trying to guess which minor crisis might finally deal the company a more serious blow. But just because it can’t be timed, doesn’t mean that the day won’t eventually come.

The typically busy spring season for the housing market was a dud, and the summer isn’t looking much brighter.

Housing services companies like Zillow Group and Rocket RKT +3.78% were loud and clear last week on earnings calls: Rocket CEO Varun Krishna called the quarter through June “one of the toughest spring housing markets in years.”

Jeremy Hofmann, Zillow’s chief financial officer, said on a conference call that the company predicted earlier this year that the market for mortgages would be flat. “We actually now think it’s going to be down low-to-mid-single digits,” he said.

The rest of 2026 will remain challenging for mortgage origination volume, says KBW analyst Bose George. The question now is what happens in 2027. “If mortgage rates remain [around] 6.75%, I think that’s going to be challenging even for next year,” he says.

But what’s bad news for mortgage companies could be a positive for bargain hunters. Buyers can expect prices to grow more slowly—or mildly decline—with less competition as long as mortgage rates remain unpredictable.

Mortgage rates at the beginning of the year were solidly below year-ago levels, notes Zillow senior economist Kara Ng. But they surpassed last year’s levels recently, she adds, referencing Freddie Mac’s weekly survey of 30-year fixed mortgage rates. Last week’s reading, at 6.69%, was higher than year-ago levels for the first time in 2026.

“From the affordability point of view, it’s going to get more challenging in the second half of the year,” she says. “And when affordability gets more challenging, that impacts sales and home price appreciation.”

Mortgage application data tracked by the Mortgage Bankers Association has cooled since the beginning of the year. The trade group expects that the number of mortgage originations in the remaining two quarters will lag behind last year’s levels, after exceeding 2025 levels in the first half.

Rocket’s early-stage data—which the company told Barron’s it derives from its brokerage Redfin, demand for its mortgage products, and signs in its servicing portfolio that a homeowner is preparing to refinance or move—“leads us to expect the third quarter mortgage market to be smaller than the second,” Chief Financial Officer Brian Brown, said on the company’s call. He added that such an occurrence is “something the industry has not seen since 2022.”

Prices will be about flat nationally, Ng says. Zillow’s most recent forecast, which shows how values are expected to change in the year ending June 2027, show them dropping in roughly half of the 100 largest U.S. metros for which data is available.

Buyers aren’t rushing in at a time when mortgage costs are rising and unpredictable. But those with the right combination of patience and cash could stand to benefit. “If you are financially qualified to buy a starter home, you are facing less competition and you’re more likely to get a price cut,” Ng says.

The Endless Cleanup at China’s Most Indebted Property Developer

China Evergrande Group feels the heat again as plans to reduce leverage rapidly.