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All Eyes on How Beijing Handles a Financial Landmine

Developer Evergrande could be about to default and collapse
By John Johnson,  Newser Staff
Posted Sep 21, 2021 12:29 PM CDT
China's 'Lehman Moment'? Wall Street Is Skeptical
A resident wields a cloth dragon outside the Evergrande Yujing Bay residential complex in Beijing, China, Tuesday, Sept. 21, 2021.   (AP Photo/Ng Han Guan)

(Newser) – US markets tanked on Monday, and those reading about the plunge would have learned that much of the blame was placed on a Chinese company called Evergrande. Which may have prompted many to wonder: What on earth is Evergrande and why did it dent my 401K? Coverage:

  • The company: Evergrande is massive real estate developer that owns more than 1,300 projects in nearly 300 Chinese cities, per the BBC. Businesses under the Evergrande Group umbrella encompass everything from wealth management to the manufacturing of food and drink to electric cars. But Evergrande also has huge debt that is coming due.
  • Interesting comparison: The "teetering" company "is the Chinese economy in miniature," writes James Mackintosh at the Wall Street Journal. "Both have operated for decades on the principle that it was worth borrowing to build, in Evergrande’s case mostly housing, in China’s case not just apartments, but roads, rail, airports and other infrastructure." The government, however, has begun policy shifts to curb rising debt, and Evergrande is paying the price, per the AP.

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  • The debt: The AP explainer says Evergrande was built on "borrowed money" and now has a staggering $310 billion of outstanding debt to banks, bondholders, building contractors, and the like. Credit agencies don't think Evergrande will be able to pay—the first debt payment deadline is Thursday—raising the prospect that it will default and collapse, notes Fox Business.
  • Lehman comparison: Many are calling this China's "Lehman's moment," referring to the collapse of Lehman Brothers at the start of the 2008 financial crisis. The idea is that an Evergrande failure would trigger "financial dominoes to fall in China's vast real estate market," per CBS News. However, a consensus seems to be building on Wall Street that the comparison isn't apt, per MarketWatch. "A true 'Lehman moment' is a crisis of a very different magnitude," says a Barclays analysis. "One would need to see a lenders’ strike across large parts of the financial system, a sharp increase in credit distress away from the real-estate sector, and banks being unwilling to face each other in the interbank funding market." So far, none of that is happening.
  • Limited contagion? Most analysts quoted in coverage also seem to think Beijing will stem the damage and thus ward off sustained global trouble. "I suspect the Chinese government is on top of this, and I don’t doubt they will deal with it severely, but I don’t think it will have the global effects the market is suggesting (Monday) morning," says Carlyle Group co-founder David Rubenstein, per Fox. (US markets were in positive territory Tuesday.)
  • Caution: It's never easy predicting how things will go in China, however. "The hard thing about particularly understanding China is that it is an opaque system and oftentimes you don’t have answers until you get answers," Rick Rieder, chief investment officer of global fixed income at BlackRock, tells CNBC. For now, the best guess is that the government will engineer a restructuring of Evergrande rather than letting it go under.
  • A warning: If Beijing is indeed serious about reining in "unsustainable debt-driven growth, it faces a series of tricky problems as it remakes its economy," writes Mackintosh at the Journal. "History suggests it is exceptionally hard to navigate such shifts without mistakes, and China is so big that the shifts will need to be global, not merely domestic. It could be a bumpy few years."
(Read more stock market stories.)

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