Home / Companies / China's Evergrande crisis explained. A 'Lehman moment' for global markets?
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China Evergrande Group's debt crisis has caused a sell-off in the global stock markets with the US index majors Dow, S&P and Nasdaq correcting by nearly or over 2% each on Monday whereas Asian markets were mixed on Tuesday as the liquidity crisis continued to weigh on investor sentiment regionally.

Hong Kong's Hang Seng hit a fresh 11-month low whereas Japan's Nikkei returned from a market holiday with a drop of almost 2%. China's yuan steadied in offshore trade to recoup some of the losses that sent it to a three-week low on Monday. Evergrande shares fell 4% as focus there shifts to Thursday when the company is due to make bond interest payments.

A Lehman Moment?

Is China Evergrande Group’s debt crisis turning into a Lehman Moment as nervous global investors fretted about default risks? Strategists at Citigroup Inc., Barclays Plc and UBS Group AG do not believe so. 

Barclays analysts argue that the market environment isn’t similar to what happened during the collapse of Lehman Brothers, UBS says the default levels are pretty low versus the size of China’s economy and Citi expects the policy makers to step in. The strategists said that it is unlikely to become China’s “Lehman moment."

“The conditions are simply not in place for even a large default to be China’s Lehman moment," Barclays macro strategists including New York-based Ajay Rajadhyaksha wrote in a note on Monday. One would need to see a sharp increase in credit distress away from the real-estate sector, banks unwilling to face each other and massive policy mistakes for that to happen, they wrote.

However, India's top banker Uday Kotak relates the Evergrande crisis to the Lehman crisis in 2008. The ongoing crunch also reminds him of India's IL&FS crisis in 2018 that triggered a liquidity crisis in the financial services market. “Evergrande seems like China’s Lehman moment. Reminds us of IL&FS. Indian Government acted swiftly. Provided calm to financial markets. The Government appointed board estimates 61% recovery at IL&FS. Evergrande bonds in China trading ~ 25 cents to a $," Kotak said in a tweet on Tuesday.

Impact on markets

“Concerns are being expressed whether this might turn out to be China's Lehman moment. This appears far-fetched now since Evergrande's debt is not widely held and, therefore, is unlikely to lead to a contagion with systemic risks. The recovery in Dow is an indication of market's confidence that a contagion is unlikely. However, investors have to be cautious since markets are richly valued and , therefore, vulnerable to corrections. The ultimate impact of the Evergrande crisis is yet to be seen and known," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

For what it means for India, Vijayakumar said that "there is another view that the Chinese crisis- the regulatory crackdown earlier and the Evergrande crisis now- bode well for India, facilitating increasing capital flows to India. This may play out in the medium to long-term.''

Evergrande's debt crisis

China's second-largest developer with more than $300 billion in liabilities equivalent to 2% of China's gross domestic product (GDP), is scrambling to raise funds to pay its many lenders and suppliers. Investors are on edge at the risk a messy failure reverberates through China's property sector and everything exposed to it - primarily banks and then the broader economy.

Evergrande employs 200,000 people and has a presence in more than 280 cities. It also has an electric car unit as well as investments in tourism, digital operations, insurance, and health.

The debt pile became a major issue last year when the government, as part of a drive to address a worrying debt mountain accumulated by property firms, began to unveil a series of measures. This has severely curtailed Evergrande's ability to finish properties and sell them to repay its debts.

However, the debt-laden property developer's Chairman in a letter to staff on Tuesday, as reported by Reuters, said that the group is confident the company will "walk out of its darkest moment."

(With inputs from agencies)

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