The Evergrande Crisis: A "Wake-Up Call", Not Yet Wider Crisis

Tom Burroughes

27 September 2021

Crisis-hit Chinese property developer, Evergrande, has reportedly (Wall Street Journal, 24 September) failed to pay bond-holders, which takes it close to the point where it is in default. The saga around the firm shines a harsh light on fault-lines in the world’s second-biggest economy.

With so much focus on China’s economy because of its crackdowns on sectors such as tech and after-hours/for-profit education, this story is unfolding at a sensitive time for Beijing. The Chinese Communist Party is tightening its grip on a country that has seen a particular form of capitalism flourish since the death of Mao and early reforms in the 1970s.

What to make of the Evergrande situation? According to , the European asset management house, it does not think the group poses a “systemic risk” but it is a “wake-up call in an over-indebted world.”

“Over the past days, financial markets have been shaken by the Evergrande saga - China’s second-largest property developer - which is facing difficulties in servicing its huge debt pile. The scale of such a potentially large restructuring event is weighing on Asian credit markets, with bonds of other companies in the property sector (an important part of the high yield segment) trading down,” the group said in a note. “Putting this event into the broader context, the contagion effect on global markets has been limited so far, with some volatility in equities (the VIX index hit an intraday high of 28.8 on 20 September 2021) and a modest retracement from historical highs (the S&P 500 is down 2 per cent).”

“Down the road, we are likely to see cracks in relation to leverage issues coming to the surface, which will require additional focus on credit selection across the board….The housing slowdown is one of the negative drivers behind the downgrade of our China GDP forecast. Activity in the sector is cooling fast and liquidity pressure will remain high with no policy changes,” it continued.

Seema Shah, chief strategist at Principal Global Investors, said: “The risk posed by the Evergrande crisis is an acid test for the resilience of the post-COVID market recovery. After the sharp dip earlier this week, global indices regained ground before dropping again today , said: “We see concerns around the policy response and associated risks prompting some near-term profit-taking, which may lead to moderate pullbacks in equity and corporate bond markets.

“The size of a potential Evergrande default and its impact on the massive Chinese property development industry may create a longer-term headwind for global growth. But the broader macroeconomic conditions and Chinese policy flexibility mean that concerns over a repeat of the global financial crisis of 2008 - or even the Asian financial crisis of the late 1990s - are likely significantly overstated, in our view.

“We see concerns around the policy response and associated risks prompting some near-term profit-taking, which may lead to moderate pullbacks in equity and corporate bond markets."