An Australian securites brokerage firm CommSec asks the question on the deeply troubled China property developer.
In summary …
Is Evergrande considered too big to fail?
- Comparisons have been made with the collapse of US investment bank Lehman Brothers in 2008, which triggered the Global Financial Crisis. A major point of difference, however, is that Evergrande holds a large land bank as its major asset, estimated to be worth around US$220 billion (source: Bloomberg)
- The Chinese government has a lever that few Western governments have – it effectively owns the domestic banks, and non-state financial companies are largely controlled. And it also has control over the real estate industry where Evergrande operates. In fact, China’s housing regulator has already stepped in to protect funds earmarked for housing projects from being diverted to creditors.
- During China’s initial Covid-19 outbreak in 2020, the financial sector “sacrificed” around US$210 billion in profits (source: Bloomberg) to support the economy. Of course, this can be done again, if necessary.
- While still a significant systemic risk, most China-observing real estate analysts and economists don’t expect Evergrande to go bust. A restructuring could still occur where some banks roll over financing. Other creditors may also receive assets, such as property and land instead of cash. And bondholders could get some of their investment back.
So, a longer, drawn-out slump rather than the another GFC? Whether that is good or bad is a judgement I am sure you can make for yourselves individually.