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Evergrande's looming default is spooking markets, but three top analysts say this isn't China's 'Lehman Brothers moment'

Markets Insider
Markets Insider
 29 days ago

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Evergrande is China's second-biggest property developer.
  • Markets are worrying over the fate of giant Chinese property developer Evergrande, which is in big trouble.
  • Yet a number of top analysts have said China's government is likely to contain the problem and insulate the global economy.
  • However, Michael Burry of "Big Short" fame is among those worried that Evergrande's demise could send shockwaves across markets.
  • See more stories on Insider's business page .

The fate of Evergrande, a highly indebted Chinese property developer, has become a worry for investors around the world.

Evergrande is China's second-biggest property developer and has huge debts, with around $300 billion of liabilities to banks and bondholders.

It warned earlier in September that it could fail to pay its creditors , prompting some investors to panic-sell its bonds. On Monday, Dow futures plunged more than 500 points and Hong Kong's Hang Seng stock index tumbled 3.3%, as investors braced for a big week in which Evergrande could default. It has a $83.5 million bond interest payment due Thursday.

If it does default, the fallout could hit Chinese suppliers as well as foreign investors including BlackRock and Allianz.

Some have suggested that if Evergrande collapses, it could be China's Lehman Brothers moment, referring to the role played by the demise of the US investment bank in the 2008 financial crisis.

Yet many market experts have said that Evergrande is too big to fail and is likely to be rescued by the Chinese government, limiting the economic impact on China and the world.

Many analysts say China's government will save the day

Bond market expert Ed Yardeni, president of Yardeni research , told CNBC he thinks it will act to limit any impact on the financial system.

"The reality is (Evergrande) is too big to fail, and I think the Chinese government is going to intervene big time," he said Sunday.

"It will be restructured, and in a way, that won't harm the economy too much over there and won't affect the global economy or financial markets the way Lehman did."

Hui Shan, chief China economist at Goldman Sachs, said: "The authorities will not allow a situation where a disorderly default of Evergrande spirals into a crisis," writing in a note Monday.

Yet she said to avoid contagion, "it is imperative for the government to provide clear communication ... and to shore up confidence among homebuyers, suppliers and contractors, banks and other non-bank financial institutions."

Simon MacAdam, senior global economist at Capital Economics , said: "A managed default or even messy collapse of Evergrande would have little global impact beyond some market turbulence."

"Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy," he said.

But MacAdam added: "Given how bloated China's property developers are, there could be a whole wave of defaults around the corner, which would have the potential to kick-start a hard landing."

Markets should brace for some 'big bumps' along the way

Some others think Beijng won't be able to keep a grip on things. Shane Oliver, chief economist at Australian bank AMP Capital , said Evergrande's size makes it highly dangerous. He expects Beijing to step in, but said there could be "a few big bumps along the way."

"At about 6.5% of total Chinese property sector debt ... its collapse and liquidation could have a systemic impact like that of Lehman Brothers in 2008, in terms of a flow on to the Chinese property and financial sectors and its economy."

Also concerned is legendary investor George Soros, founder of Soros Fund Management . He said in a Financial Times piece that it is "over-indebted and in danger of default. This could cause a crash."

Famed investor Michael Burry of "Big Short" fame endorsed a Twitter thread by a financial analyst saying that contagion is already at work in Chinese markets, and could soon spill abroad.

"There are significant losses already for the international holders of China credit and equities," the analyst wrote. "Uncertainty and volatility will remain elevated."

Read more: Big-name investors are navigating China's complex landscape right now by turning to these 10 experts from firms like Muddy Waters and BCA Research

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