Markets are not yet alarmed by China’s Evergrande’s struggles.
Debt-crippled Foreign investors are keeping a close eye on Chinese real estate firm Evergrande’s problems, but markets do not appear to be concerned about a significant contagion, at least not yet. With a $300 billion debt load, bankruptcy is a genuine possibility, especially after Evergrande suggested on Tuesday that it would be unable to pay its creditors.
IG France analyst Alexandre Baradez, on the other hand, noted that “the market is not surprised as it may have been by Lehman Brothers,” the American banking behemoth whose stunning collapse in 2008 sparked the global financial crisis.
AFP quoted Baradez as saying, “Lehman was a shock: a well-rated bank that vanished suddenly.” However, “investors are preparing” with the Chinese enterprise.
Evergrande is one of China’s largest private corporations and one of the country’s top real estate developers, with a presence in over 280 locations.
The company, which is crippled by debt, had its Hong Kong-listed shares plummet this year as investors worried about its financial health.
The Chinese government appears to be hell-bent on taking control of the Evergrande crisis, even if it means forcing the company to shut down.
The question is how Beijing would handle a prospective debt default.
“The chances of Evergrande defaulting in a disorderly manner are definitely not very high due to the societal instability that could result from people losing their life savings,” says Omotunde Lawal, head of developing markets corporate debt at investment company Barings.
Given China’s “overall emphasis on social and economic stability,” Beijing would want to prevent it, she said.
Analysts predict a government-led reorganization that will pay off debts while continuing to operate certain corporate activities to limit losses.
Foreign clients have a limited exposure to Evergrande’s debt: non-Chinese investors hold around $7 billion of the company’s debt.
According to Baradez, this sum “is not hard to absorb or likely to alarm” financial markets.
Even if the global banking system is unlikely to be disrupted, the company’s problems might have far-reaching consequences.
“It’s possible that an American hedge fund bought Evergrande debt and now needs to liquidate other positions to hedge,” Baradez warned, citing the risk of a domino effect.
He compared the scenario to the Archegos incident, which occurred at the end of March and included a New York investment firm that caused billions of dollars in losses to many banks by taking highly hazardous bets.
The Evergrande crisis may potentially impair international investors’ enthusiasm for. Brief News from Washington Newsday.