Default by China Evergrande unlikely to spark malaise that threatens China’s financial system, analysts say
- Comparison to collapse of Lehman Brothers ‘far-fetched’, analysts say
- Beijing not expected to take action, Evergrande hit to financial system ‘manageable’, S&P says
“We don’t expect government actions to help Evergrande unless systemic stability is at risk. A government bailout would undermine the campaign to instil greater financial discipline in the property sector,” S&P Global Ratings analysts Matthew Chow and Christopher Yip said in a research note. “Government support to prevent a default is only likely if contagion risks cause other large developers to fail. This could threaten the stability of the financial system and economy. We think the hit to the financial system from Evergrande alone will be manageable.”
Angry protest at headquarters of China Evergrande as property giant faces liquidity crunch
The worries about cash-strapped Evergrande’s ability to repay its massive debt load comes as Beijing has been trying to cut borrowing levels in China’s property sector and after warnings by foreign investors about rising debt levels in the mainland.
“Evergrande’s balance sheet doesn’t seem a good indicator of the entire real estate sector; its liabilities have grown far more rapidly than those of the entire Chinese property sector. And Evergrande’s profit margins have collapsed over many years – which is also at odds with the overall property complex,” Barclays analysts Ajay Rajadhyaksha and Jian Chang said in a research note. “We don’t believe the business model of Chinese property firms is on the whole broken; Evergrande is in worse shape than most, both in terms of leverage and its business model.”
The comparison of Evergrande to the global crisis sparked by the collapse of the US housing market and subsequent bankruptcy of Lehman 13 years ago is “far-fetched”, according to Alexandre Bon, a market risk expert at financial software provider Murex.
“We are not on the doorstep of a Chinese version of the Asian Financial Crisis, but there is a risk of major contagion from Evergrande and a credit crunch affecting financial markets through the real economy,” Bon said.
While Evergrande’s liquidity crunch and its impact on the property sector presents a potential systemic risk to China’s financial system, it is not expected to be a “Lehman moment” for China, according to Citigroup. Any dip in banking stock prices could be an “enhanced opportunity” to buy quality names in the sector, the bank said.
“Policymakers will likely uphold the bottom line of preventing systematic risk to buy time for resolving the debt risk, and push forward marginal easing for the overall credit environment,” Citigroup analyst Judy Zhang said in a research note.