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FinanceHere's why the Evergrande crisis is not China's 'Lehman moment'

Here’s why the Evergrande crisis is not China’s ‘Lehman moment’

The Evergrande headquarters is seen in Shenzhen, southeastern China on September 14, 2021, as the Chinese property big stated it is going through “unprecedented difficulties” however denied rumours that it is about to go below.

Noel Celis | AFP | Getty Images

Evergrande holds bodily property

However, on the subject of the scale of potential influence on worldwide monetary markets, analysts level to a serious distinction between the Evergrande crisis and the Lehman collapse: Evergrande holds land, whereas Lehman held monetary property.

Evergrande has money stream issues, however discuss of systemic dangers is “a bit overdone, frankly,” Rob Carnell, regional head of analysis for Asia-Pacific at ING, stated Wednesday on CNBC’s “Squawk Box Asia.”

“Let’s face it, this is not Lehman’s, this is not LTCM,” Carnell stated, referring to American hedge fund Long-Term Capital Management, which failed in the Nineties. and spurred a panic. “It’s not a hedge fund with massive leveraged positions or a bank whose financial asset prices are hurtling towards zero. It’s a property development firm with quite a lot of debt, you know, 300 billion plus thereabouts in dollar terms.”

He expects that if Evergrande can get some money stream into its bodily property, the firm can end its improvement tasks, promote them and begin paying down debt.

On Wednesday, the firm’s actual property group introduced it will pay the curiosity on time on a mainland-traded bond denominated in yuan.

“Evergrande is facing a liquidity crunch although it owns a large land bank,” Larry Hu, chief China economist at Macquarie, stated in a report Tuesday. He famous that the developer’s property consist primarily of land and housing tasks which might be value simply over 1.4 trillion yuan ($220 billion).

No Lehman-style contagion story is smart right here and due to this fact no Lehman Moment will there be.

The collapse of Lehman Brothers led to a crash in monetary derivatives — credit-default swaps and collateralized-debt obligations — “causing the market to doubt the health of other banks,” Hu stated.

“But it’s quite unlikely that the Evergrande saga would cause the land price to crash,” he stated. “After all, the value of land is simply more transparent and stable than financial instruments. It’s especially so in China, where local government monopolizes the land supply.”

“As the result, [the] local government has a strong incentive to stabilize land price. In the worst-case scenario, local government could even buy back land, as they did in 2014-15,” he added.

Strong authorities management

Another essential distinction in Evergrande’s case is the larger stage of presidency management and involvement in China’s actual property trade.

“Chinese banks and many other entities are government arms first, intermediators a distant second,” analysts at analysis agency China Beige Book stated in a report Monday. “Even non-state financials can be controlled to an extent rarely seen outside China. Commercial bankruptcy is a state choice.”

“Beijing says lend, so you lend; when or even whether you get your money back is secondary,” the report stated. “No Lehman-style contagion story makes sense here and therefore no Lehman Moment will there be.”

The legendary U.S. funding financial institution collapsed 13 years in the past this month in an iconic second of the international monetary crisis. The financial institution underwrote tens of billions of {dollars}’ value of securities backed by dangerous mortgages throughout a U.S. housing bubble. The U.S. authorities finally allowed Lehman to fail, whereas bailing out different monetary establishments.

In China’s case, Beijing has tried to permit the market to play a larger position in the economic system by letting more state-owned enterprises’s loans default.

Authorities will be patient in Evergrande’s case as they have two goals of preventing excessive risk-taking and maintaining stability in the property market, said Macquarie’s Hu.

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“Policymakers would choose to wait first, then step in later to ensure an orderly debt restructuring,” he said. “A wholesale bailout is not very likely and shareholders/lenders might take a big loss. But the government would make sure that the pre-sold apartments get done and delivered to homebuyers.”

Hu also pointed to the Chinese government’s recent track record in restructuring giants such as Anbang Insurance, Baoshang Bank, HNA Group and China Huarong Asset Management. “China’s banking system has an annual profit of 1.9 [trillion yuan] and a provision of 5.4 [trillion yuan], which could easily absorb the loss from Evergrande,” he said.

‘China has the tools,’ IMF says

Even although public authorities statements in latest months have referred to as for stopping main monetary dangers, Chinese authorities’ intervention is not a given.

Chinese officers have to date made few main public statements about Evergrande.

At a press convention final week, a National Bureau of Statistics spokesman stated the division is monitoring the difficulties of some massive actual property corporations and the potential influence on the economic system.

China’s actual property market and associated industries resembling development account for greater than 1 / 4 of nationwide GDP, in keeping with Moody’s estimates.

Bets that property costs would solely rise finally pressured many Chinese households to take out mortgages to afford properties. In the previous couple of years, the authorities has tried to chill the market with measures resembling restrictions on the stage of debt builders can tackle.

— CNBC’s Eustance Huang and Weizhen Tan contributed to this report.

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