Stocks tumbled around the world on Monday as markets focused on the severe troubles of property developer China Evergrande Group. A Chinese debt crisis will — either now or in the near future — bring down China’s economy, and the U.S. must delink from that country to reduce the damage to itself.
A crucial test comes Thursday, when Evergrande must pay $83.5 million in interest on its March 2022 bond. Payment of 232 million yuan due the same day has been “settled through negotiations.” Then, on Sept. 29, $47.5 million comes due on its March 2024 bond.
The betting on Wall Street is that Evergrande, the world’s most heavily indebted property company with a stunning $305 billion in obligations, will not become China’s Lehman Brothers.
Barclays on Monday noted that “a true ‘Lehman moment’ ” would require “a lenders’ strike across large parts of the financial system, a sharp increase in credit distress away from the real estate sector, and banks being unwilling to face each other in the interbank funding market.” For this to happen, most believe, “Chinese authorities would need to make a series of policy mistakes in response to the crisis.”
Behind China’s strong currency walls — the renminbi is not convertible on the capital account — Beijing managed to avoid the worst effects of the 2008 downturn. Chinese authorities averted disaster by overseeing a massive expansion of credit and forcing lenders to rollover debt of distressed companies.
Some believe Beijing will lean on lenders to not call defaults should Evergrande not pay interest within its 30-day grace periods. There is confidence that central authorities can, once again, support the company and thereby avoid disaster.
Beijing, if it wanted to, could save Evergrande, but confidence that China’s technocrats and political leadership can avoid a contagion is misplaced. In short, they don’t have sufficient resources.
By Gordon Chang