Will Evergrande be China’s Lehman Brothers moment?Will the...

Will Evergrande be China’s Lehman Brothers moment?

Will the demise of Evergrande cause more damage than policymakers can handle? Macro experts don’t think so.

Jonathan ShapiroSenior reporter
Sep 20, 2021 – 3.04pm


Over the weekend, the topic du jour among the macro community was whether the looming default of Chinese construction giant Evergrande marks a Lehman Brothers moment for the world’s second largest economy.

The growing fear is that its demise, and the losses the banks and bondholders that provided the $US350 billion of debt will have to swallow, could trigger a contagion event similar to what the US experienced in September 2008, which led to the collapse of the Lehman Brothers investment bank.

Evergrande, which went public in 2009, is one of China’s most important companies. The construction giant’s model is to borrow money to buy up state land, and then build homes en masse.

An Evergrande plaza in Beijing, with a map showing its development projects in China. AP
The linkages into the economy run deep. Housing construction has been an engine of economic growth and individual wealth creation. But Evergrande's enormous debt pile left it vulnerable to a weaker property market.

Now, those same financiers are facing large write-offs, potentially impairing their appetite to provide further credit to the sector.

While there is concern, for now, the prevailing view is that Chinese policymakers have seen this coming. And the manner of its collapse is, to some extent, by design.

Attempts by the company to reduce debt measures below a declared red line set by policymakers ran into roadblocks. China’s banks were also told earlier this year to stress test an Evergrande collapse, according to reports, and as far back as 2018 the company was identified as a systemically important entity.



So, the decision to halt trading in its bonds should not come as a shock. Some measures of panic, however, appear to be ticking upward. The Asian high-yield bond index has spiked, although deeper analysis shows the dramatic jump in spreads is limited to Chinese property issuers, which are a disproportionately large part of the market.

The worry has always been that second-order effects will be more severe.

More than a million home buyers are in limbo as Evergrande has fallen further behind on promises to more than 70,000 investors, says London bond fund Stratton Street. There are more than 160,000 direct employees and more than 3.8 million jobs tied to its activities, it says, and the unfinished projects span an area equivalent to three quarters of Manhattan.
Markets don't come first

The argument against a systemic event is that China, as a sovereign, has low levels of debt even though private sector debts have swelled. The banks too are under its remit, and the likelihood is that problem loans will be restructured and socialised.

But given property’s importance to China, and China’s importance to global growth, Evergrande’s demise is threatening to hurt sentiment.


What we have also come to appreciate is that China’s policymakers care less for the market and its investors, and more for the wellbeing of its citizens.