Questions are being raised about whether China is facing its own Lehman Brothers moment – wherein the fall of a single company is powerful enough to disrupt markets all around the world.
This is because of concerns of a possible collapse of Evergrande, a massive Chinese property developer and real estate company, which is currently has debt outstanding of a staggering $300 billion. Economists and analysts fear that its collapse could set off a chain reaction that will spreads to markets overseas.
“Some fear an Evergrande meltdown will have systemic risks on par with the impact Lehman Brothers’ demise had on the US stock market,” Ed Yardeni, president of Yardeni Research, wrote in a note to clients earlier during the week. .
In a similarity to the heydays of Lehman, the scale of Evergrande’s business is massive which makes many to estimate that the company’s failure will be felt widely. The company reportedly has more than 200,000 employees, had generated more than $110 billion in sales last year and currently has over 1,300 projects under developments, according to reports.
The Evergrande situation is being closely watched by Wall Street, which reflects the extraordinary amount of borrowing Chinese companies and families have taken on over the years.
But there is a wider belief that Evergrande situation will not impact US markets or the domestic economy.
Investors on Wall Street currently are confident that the damage would be limited by authorities in Beijing, using their vast control over the Chinese economy.
There is also little evidence of a contagion from the forecast possible event for the US markets or other markets.
“I don’t think the Evergrande meltdown, and the financial problems of Chinese property companies more broadly, will reverberate back on the US economy or markets,” Mark Zandi, chief economist at Moody’s Analytics, said.
“We think that the ‘China’s Lehman moment’ narrative is wide of the mark,” Simon MacAdam, senior global economist at Capital Economics, wrote in a note earlier in the week.
Even a “messy collapse” of Evergrande would have “little global impact beyond some market turbulence”, MacAdam said.
The Evergrande issue was dismissed as a “Chinese domestic credit problem” by David Kotok, co-founder and chief investment officer of Cumberland Advisors.
“It does not look as if it has any contagion effects on American companies or American financial markets,” Kotok said. “We see no credit spread widening,”
However many agree that a collapse of Evergrande could impact the Chinese economy – the second largest economy of the world after the United States as well as a key catalyst for global growth.
In its efforts to conserve cash, Evergrande has already suspended work on some projects. But China’s real estate market will come under pressure from this move because of the company’s size.
“Property development has been a major growth engine for the Chinese economy over the last decade,” Guy Lebas, chief fixed income strategist at Janney Capital Management, told CNN in an email.
China’s economy could be slowed by the lack of large-scale real estate development, he said. There is however a debate over the productivity of that growth to begin with.
“While there may be modest knock-on effects in other economies, I don’t expect them to be too large,” Lebas said.
(Adapted from CNN.com)