China’s ‘Lehman moment’

What is the news?

Failure of Evergrande (China’s too big to fail real estate sector developer) would affect economic activities in China, which in turn, may have cascading negative consequences for the world.

Introduction

Financial stress in China’s largest real estate developer, Evergrande, has led to turmoil across global markets.

Evergrande has a total debt exposure (including trade payables) of over $300 billion, which includes $19 billion in offshore US dollar-denominated bonds.

Recently, the real estate giant has issued warnings that it can default on $80 million worth of interest payments.

Experts are referring to this as “China’s Lehman moment”, in comparison to the 2008 bankruptcy of Lehman Brothers, which was a trigger for the global financial crisis.

The financial stress has been caused by tighter controls imposed by the People’s Bank of China, and a slowdown in housing demand.

How Evergrande’s crisis is affecting the global economy?

Impact on global stock market: Fears of this default have led to a crash across Chinese debt assets. Further, it has triggered big sell-offs in stock markets across Hong Kong, other Asian markets, including India, as well as in Europe. It has also triggered a panic sell-off in industrial metals and fuels. The prices of real estate stocks in Hong Kong have dropped to 2016 levels, while real estate bonds yields have spiked to 14.5 per cent.

Impact on commodity metal and fuel: A fall in Chinese activities will also hurt commodity metal and fuel players, given China’s dominance in manufacturing.

Impact on Exporters: If the yuan falls, exporters everywhere else will also be under intense pressure.

Impact on Global central banks: If it does default, every major central bank will probably open liquidity taps to ensure global markets don’t freeze in contagion.

Source: This post is based on the article “China’s ‘Lehman moment’” published in Business Standard on 21st Sep 2021.