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Will China’s ‘Lehman Moment’ be in Evergrande? Not saying Wall Street


Unwanted memories of market turmoil following the Lehman Brothers attack nearly 1 year ago are sparking problems at China’s detrimental property giant Evergrand. But Wall Street analysts and economists, denying any fear of the pronunciation that might be the famous last word, argued that comparisons are not static.

Indeed, Barclays analysts argued that speculation that Evergrand’s story could become China’s “Lehman moment” was unimaginable.

“In our opinion, not even close,” they said in Monday’s note.

“Yes, Evergrand is a big property company. And yes, maybe (probably) Willpower) Will have a spillover effect on China’s property sector, including economic impact. And yes, it comes at a time when China’s growth is already starting to slow down, ”they acknowledged.

Views: Evergrande Stock Market Risk: Here’s What Investors Need to Know About Teetering Property Giant

“But the real‘ Lehman moment ’is a different level of crisis. One has to watch the strike of donors across a large part of the financial system, the sharp rise of the credit crisis away from the real estate sector and the reluctance of banks to face each other in the interbank funds market, ”analysts added. On top of that, the Chinese authorities have to make a series of policy mistakes in response to the crisis.

Related: Evergrand’s potential debt blocking is ‘not contagious’ for the stock market, with people saying the company went bankrupt 10 years ago

So far, economist Lingo has been missing this kind of spillover or infection, analysts said.

Bond-market spillovers have so far been limited to a number of high-yielding developers, noted Wei Yao and Michelle Lam, analysts at Society General, in a note. Evergrand’s major investors have been under pressure in the stock market, but their spending has seen little change, economists noted, while observing relative calm in China’s currency markets, although some early signs of cash reserves are beginning to appear.

For the bond market, investors seem to be “distinguishing between safe and risky orrow holders and expecting limited spillovers in larger financial markets for the time being,” wrote the Sokzen economist. They noted that the IBoxx China Real Estate High-Yield Index, which tracks the sector’s offshore bond performance, fell nearly 20% last week, with sales closing among several risky orrow recipients, including Guangzhou R&F. Fantasia.

Meanwhile, the sector’s investment-grade index was largely stable, they noted. That, they said, was a similar story, with the credit spread of low-rated real estate bonds, investors demanding higher premiums to offset risks, while the spread of high-rated bonds remained stable. The impact of the larger corporate bond market was a more nuanced term.

That said, the shocks surrounding the Evergrand situation were attributed to the weakness of global equities and other assets considered risky, sending investors to traditional conservatism, including the Treasury.

While other issues were seen during the game, the Dow Jones Industrial Average DJIA,
-1.78%
Monday afternoon points more than points or 1. Closed at 1.8%, session 2 points after its session was reduced. Large-Cap Benchmark S&P 500 SPX,
-1.70%
The day fell 1.7% and the tech-heavy Nasdaq Composite Comp,
-2.19%
Decreased by more than 2%.

Yield on 10 year Treasury Note TMUBMUSD10Y,
1.312%
Investors sought security on government paper as it fell about 7 basis points to 1.306%. As the price of debt increases, so does the yield.

The collapse of Lehman Brothers on September 15, 200, led to a market downturn and a credit crunch that threatened the global financial system, prompting an urgent response from global policymakers.

Investors, meanwhile, have long been concerned about China’s highly leveraged real estate market, although expectations that Chinese authorities will provide backstop have allayed those fears in the past. Concerns over Evergrand have intensified amid China’s widespread regulatory crackdown.

Read: Why Evergrand suddenly exploded into a potential global financial market crisis

The Barclays team argued that Evergrand’s 300 30,000 billion liability was large but only a small fraction of it was financial securities. Meanwhile, loans t about 35 35 billion. “Even if these loans end up with a slight recovery, in a chaotic default, again, the numbers are not big enough to just hit the scale,” they said, noting that China’s banking system has assets of 40 40 trillion to 45 45 trillion, and total loans exceed 30 30 trillion. .

Evergrand’s 15 15.7 billion offshore liability or 56 billion renminbi onshore bond liability is harder to show than the threat of existence, they said.

Admittedly, the fear is not just of Evergrand. But they were also skeptical of a spillover that could lead to a fire sale of Chinese property or an increase in orrowing costs for other property developers, noting that some companies have seen more than 15% bond trade.

“Evergrand’s balance sheet does not appear to be a good indicator for the entire real estate sector; Its liabilities have grown much faster than the Chinese property sector as a whole, ”they wrote, noting that Evergrand’s profit margins have collapsed over the years, in conflict with the overall property complex.

More broadly, analysts argued that the Lehman collapse could not be compared because crises on that scale were events driven by responsibility.

As the wholesale fund markets closed to Lehman in 2008, investment banks were suddenly unable to roll over commercial paper, causing the banks to explode at the risk of rivalry as they feared each other. Aside from U.S. policymakers, Lehmann is a defaulter of his responsibilities, the onset of a full-blown financial crisis, analysts recall.

They say the situation in China is very different.

Not only is the property sector linked to the financial system on the same scale, debt capital markets are not the primary source of funding. Instead, China remains a command and control economy, they said.

This means that in an extreme situation, even if the capital market is closed to all Chinese property companies, regulators can instruct banks to lend their loans, retain them and buy time for extended “workouts” if necessary, Barclays argued.

A massive “donor strike” will only occur if the authorities make a “policy error”, allowing the situation to become unresolved without intervention, regardless of the systemic risk to the financial system.

“And we think it’s very unlikely,” analysts wrote. “Lehman’s lesson was that moral hazards need to be given a back seat to systemic risks.”



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