With Evergrande Group at risk, will China face its 'Lehman Brothers moment'?
- It is among the country's largest real estate firms
- Evergrande has borrowed heavily to build apartments
- The Chinese housing prices have increased steadily for more than two decades
"Evergrande Group" is one of China's biggest property developers that is at risk of buckling under billions of dollars in debt. This has raised concerns among investors around the globe that China could face a "Lehman Brothers moment" if the firm collapses and triggers financial contagion.
With this, let's take a look at why Evergrande Group is rattling financial markets from Hong Kong and Wall Street.
What is Evergrande Group?
Evergrande Group is a company that invests in, builds and manages thousands of residential properties. It is among the country's largest real estate firms, with total assets listed at $356 billion and reported annual sales of more than $108 billion.
Also read: Evergrande crises: Complete timeline
Over the past few years, Evergrande has borrowed heavily to build apartments, office buildings and shopping malls. Now analysts worry the company may not be able to repay the $103 billion it owes to banks, construction firms and other creditors.
Adding to this, the pressure is a push by Chinese financial authorities to cool the country's overheated property sector while also reining in borrowers and investors.
CBS News reported that Jonas Golterman, senior markets economist with Capital Economics, said, "The struggles of Evergrande and other developers are in large part the result of tightening restrictions as the authorities try to curtail some of the past excesses in the property sector."
Why are Evergrande's woes evoking Lehman Brothers?
The major drawback in this scenario is the fear that Evergrande's failure could lead to major losses by its lenders and bondholders. That could cause the financial dominoes to fall in China's vast real estate market — much as the collapse of investment bank Lehman Brothers in 2008 sparked a crisis that would take down the US housing market and sink the American economy into recession.
However, the Chinese housing prices have increased steadily for more than two decades, while the country's economic steam engine remains heavily dependent on construction.
The overall debt, as a share of its gross domestic product, has doubled since 2008.
The country's burgeoning middle class is particularly exposed, having poured billions of dollars into buying homes over that period. A sudden financial shock that slammed the value of residential and commercial properties could ripple across the Chinese economy, according to analysts.
Will Evergrande's problems affect the US economy?
Evergrande's problems have already affected the US economy. According to reports, it can be seen if one is participating in a 401(k) retirement savings plan or are otherwise invested in the stock market.
On Monday, the US shares fell sharply, with many investors trying to gauge the potential fallout for China if Evergrande goes bust.
However, other factors also weigh on investor minds. Those include the ongoing impact of COVID-19 on US growth; political feuding in Washington, D.C., over raising the nation's debt ceiling; and whether the Federal Reserve plans this week to signal it's ready to start withdrawing emergency stimulus.
How will this impact Wall Street?
Presently, several investment analysts are still betting that the Chinese government would intervene to support its own economy if a failure by Evergrande caused financial turmoil. That is just what Beijing did a few weeks ago when it stepped in to bail out Huarong, a large asset management firm.
President Xi Jinping also has put his reputation on the line by vowing to reduce inequality. That almost certainly means protecting millions of homeowners if their wealth is in danger of being vaporized.