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Thursday, January 20, 2022

Evergrande’s default won’t be a “Lehman moment” for China’s state-controlled economy

After months of speculation, two major Chinese residential property developers defaulted on their bonds.

In December, Evergrande and Kaisa defaulted on US dollar-denominated bonds totaling $ 1.6 billion. Evergrande has been the most visible, with a Shenzhen-based developer trying to raise money for months to pay off its $ 300 billion commitment.

For several months, experts have been predicting a default by Evergrande, which could lead to a lack of funding for the real estate sector, as most Chinese developers are heavily indebted, which in fact will end in the so-called “Lehman moment” for the entire financial sector in China. …

Even the US Federal Reserve has warned of the risks to the US economy from contagion from the financial collapse in China. “Financial stresses in China could put pressure on global financial markets from deteriorating risk sentiment, create risks to global economic growth and affect the United States,” the Fed’s latest financial stability report said.

But a week after the two largest Chinese developers defaulted, there is little infection in the market.

China’s high-yield market saw a slight rebound after warnings by Evergrande and Kaisa of default until the week of December 13, when bonds from smaller developer Shimao Group Holdings sold off on rumors of financial distress. Up to this point, Simao was considered one of the “strongest” Chinese developers.

This is not to say that a bigger challenge will not torpedo China’s financial system, but Evergrande and “rumors” of financial difficulties are not too big problems that the Chinese Communist Party (CCP) cannot solve today. And therefore, Evergrande will not be the cause of the “Lehman moment” for China.

Let’s go back to 2007-2008, when the Great Financial Crisis hit the US financial sector. In the wake of the Bear Stearns collapse, Lehman was seen as potentially the next domino to fall as stocks in a high-leverage New York investment bank plunged in late summer 2008.

Lehman depended on short-term financing for commercial paper, which is a type of short-term bond whose availability and liquidity depend on trust and reputation. With rumors circulating of the imminent collapse of the firm, no investor was willing to lend it a loan.

In this case, Lehman suffered damage to its reputation. He was unable to obtain funding and there was no support from the federal government.

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On the weekend of September 13, 2008, the New York Federal Reserve held a meeting attended by CEOs and executives from many of the major New York and international investment banks to discuss the Lehman bailout plan. In the end, two would-be bidders, Bank of America and Barclays, refused to buy all of Lehman (the former decided to merge with Merrill Lynch, another bank rumored to be in financial trouble), leaving Lehman with no other choice. except to file a claim. filed for bankruptcy ahead of Monday, September 15th.

The Fed could not force any of its competitors to save Lehman, and ultimately did not consider the company “too big to fail” and intervene on its own.

Western experts, evaluating China through the free market, through the prism of the West, often forget that China is still a socialist planned economy. The CCP controls China today. Any organization, company, or person will be involved in the party’s team effort.

A disaster like this could have had a completely different ending in China. The CCP could force every single Chinese bank, asset manager and real estate company to save Evergrande if it chose to go in that direction.

Evergrande has deliberately refused to pay interest on offshore bonds. The fact that Beijing regulators told the media that the developer must resolve its debt problems with the market means that the authorities have decided not to intervene.

Evergrande could get funding if the CCP wanted funding. Beijing can force any of its large commercial banks to provide loans. In the late 1990s, large government-sponsored asset management firms were created specifically to deal with bad debts, and they could instruct them to buy back Evergrande’s debt at par. It was done for these firms.

Thus, Evergrande’s “limited default”, to use Fitch’s description, is a political decision of the Central Committee.

This is a planned default as part of Beijing’s current tight control of the country’s real estate market: to keep property prices from rising too much, but not to collapse.

The views expressed in this article are those of the author and do not necessarily reflect the views of The Epoch Times.

To follow

Fan Yu is an expert in finance and economics and has been analyzing the Chinese economy since 2015.

World Nation News Deskhttps://www.worldnationnews.com
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