what is China doing to avoid a “Lehman Brothers 2.0”?

Xi Jinping
The resulting turmoil could increase pressure on Chinese leaders to rein in controls or at least take steps to limit market impact (Image: Bloomberg)

What are the limits of the president’s restrictions China , Xi Jinping, to the country’s real estate sector?

The issue has suddenly become urgent at negotiating tables around the world. For months investors saw the debt crisis of the developer China Evergrande under control, but on Monday they rushed to price the risk that Xi’s measures to cool China’s housing market would have the opposite effect and end up affecting the economy.

The resulting turmoil could increase pressure on Chinese leaders to rein in controls or at least take steps to limit the impact on the market.

Remembering that the Evergrande case is being compared to the American bank Lehman Brothers, which went bankrupt and started the 2008 financial crisis.

Analysts of Goldman Sachs recommended that authorities send a “clearer message” about how they plan to prevent Evergrande from causing “significant impacts” on the broader economy. Citigroup said authorities could make an “excessive control policy error.” Société Générale economists attribute a 30% probability of a “hard landing”.

“While most don’t expect Evergrande to suddenly collapse, the silence and lack of important action by authorities makes everyone panic,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered in Hong Kong. “I hope China will at least offer some verbal support soon to stabilize confidence.”

Hong Kong’s Hang Seng Index fell more than 3% on Monday, led by real estate companies. The average price of Chinese issuers’ dollar-denominated speculative-grade debt dropped to its lowest in about a year. The 12% drop in iron ore futures only made things worse, as did holidays in many Asian markets.

Chinese officials, who recently hired consultants to review Evergrande, have not given public assurances that there is a state-led plan to resolve the crisis.

Official media comments have avoided the subject, with the exception of a tabloid that claims Evergrande is an “isolated case” and that has accused Western media of attacking the Chinese economy. There are no clear signs of the entry of state funds into the domestic stock market, as occurred in March.

The answer so far has been largely limited to the role of the People’s Bank of China, which injected 90 billion yuan net into the banking system on Friday. And another 100 billion yuan on Saturday.

Evergrande has about $300 billion in liabilities, more than any other real estate developer in the world. It is a giant in China’s high-yield dollar bond market, accounting for about 16% of notes in circulation.

About $83.5 million in interest on a five-year dollar bond is due on Thursday, and failure to pay within 30 days could constitute a default. Evergrande also has to pay a 232 million yuan ($36 million) coupon for an onshore bond on the same day.

Evergrande shares dropped 19% on Monday, which dropped its market value to an all-time low for a brief period. The stock closed down 10%.

“As officials show no signs of hesitation to deleverage the housing market, the latest Evergrande headlines likely suggest that housing activity could deteriorate further if the government does not provide a clear path to a future resolution,” Goldman economists said. led by Hui Shan in a report on Sunday.