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Major Chinese real estate developer Evergrande totters on the brink; investors fear collapse, which could trigger another major financial liquidity crisis

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Andrea Verdelli/Bloomberg via Getty Images

As if the global economic condition were not severe enough after months of devastating impacts wrought by the COVID-19 pandemic, investors are warning that the possible collapse of a major Chinese real estate development company named Evergrande could trigger a liquidity crisis similar to the one that occurred in late 2008, leading to a multi-year global recession.

China-based Evergrande is one of the world's largest real estate development companies, and it has been publicly facing financial woes for several months. It is believed to be the world's most indebted developer, with over $300 billion in estimated liabilities, according to Reuters. Alarm bells began blaring in late September when Evergrande missed several major international bond payments, leading several agencies to downgrade Evergrande's credit rating, which has exacerbated their inability to restructure their debt. Evergrande was formally declared in default earlier in December. A spokesperson for the company on Wednesday said that it was "actively engaging" with creditors in an attempt to avoid total collapse.

Evergrande's inability to repay its debts has already begun to strain the liquidity of some financial institutions, and may have already had significant spillover effects. Fellow Chinese real estate developer Kaisa made news last month when it failed to repay a $400 million bond and announced that it was exploring restructuring options. The Financial Times notes that other major Chinese real estate developers, including Fantasia and China Modern Land have also missed repayment deadlines recently.

Investors caution that if more dominoes continue to fall, and other developers find themselves unable to make payments on their debts, it could cause a global financial liquidity crisis similar to the one that was widely blamed for starting a recession in late 2008.

The situation is serious enough that the Federal Reserve warned in November that it threatened to destabilize the entire Chinese market, which could have significant spillover effects into the United States.

The company is for now publicly attempting to assure investors that it can work its way out of the crisis without a collapse. In a Wednesday statement to the Hong Kong Stock Exchange, the company said, "In view of the risks the Group is currently facing, the Risk Management Committee of China Evergrande Group is utilising its extensive resources and will actively engage with the Group's creditors." However, the statement closed with, "Shareholders of the Company and other investors are reminded to exercise caution when dealing in the securities of the Company."

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