For years, there have been whispers about the fragility of the Chinese financial system. As a country with many of its financial institutions being partially or completely owned by the state, there have been many reports of bad loans made as political favors. On a larger scale, the bigger issue is the misallocation of resources which can have damaging, long-term effects for any country.

While, these issues would prop up every now and then over the past couple of years, they would mostly be addressed by authorities injecting liquidity into the financial system which would solve the short-term problem but exacerbate the longer-term one. Lately, the Chinese government seems to be intent on creating some discipline for its industries which means that it is willing let to let companies feel some pain.

So, that is why the current crisis - Evergrande is so concerning. Evergrande is the second-largest property developer in China and is unable to make payments on its massive debt load. The company seems to be nearing default as it already missed a debt payment last week and has another one due this week. Technically, it still has about 20 days to until it's in default.

Given Evergrande's size and that real estate makes up 30% of China's GDP, these developments have led to selling in stocks in China and globally. Even commodities and sectors that are connected to Chinese demand like iron ore, copper, and steel were hit hard by the news.

According to sources, Evergrande has more than $300 billion in debt with much of it tied to projects that are outside of the real estate industry. Another issue is that due to population growth and demographics, there was an insatiable demand for new housing in China. Now, the population is peaking and aging which means that demand is quickly evaporating. This is resulting in empty or uncompleted building with some of them slated for demolition.

Currently, the company is negotiating with debt holders to reduce payments and looking to sell off some of its assets to raise cash. However, these efforts haven't proven fruitful. Therefore, default is increasingly an option.

Evergrande's fate doesn't look bright as shares are already down 85% this year in Hong Kong trading. For investors, the bigger questions is what will the spillover impacts be? And will China stick to its recent stance of bringing more discipline to the private sector or bail out the beleaguered firm?