By
Steve Muchoki
September 26th, 2023
Many analysts have maintained that the China Evergrande is not too big to fail, a phrase that suggests the company’s fall may not have so much of a pervasive impact on the broader economy.
China Evergrande Group (HKG: 3333) is seeing the darkest moments in its existence, bedeviled by a liquidity crisis the S&P Global Inc (NYSE: SPGI) said is likely to compound if the company is unable to meet up with its debt obligations. Placing the Chinese economy at risk, S&P Global analysts say “Default is Likely” according to a report drawing on the interest payment on its offshore bond due Thursday.
The indebtedness of China Evergrande has drawn concerns in the mainstream market as many fear the company’s liquidity crisis may be contagious to other Chinese and global markets respectively. Drawing on this, there have been speculations of Chinese government intervention to prevent a ripple effect in the economy, however, S&P Global says this is unlikely to happen unless the impact is a far-reaching one.
“We do not expect the government to provide any direct support to Evergrande,” said the S&P credit analysts in a Monday report. “We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy.”
The China Evergrande crisis impacted the Chinese stock market on Monday with the Hang Seng Index (INDEXHANGSENG: HSI) falling by 3% on Monday. Ahead of the upcoming holidays, the index has printed a slight recovery and is currently up 0.51% at the time of writing to 24,221.54.
There are speculations that Chinese banking outfits will be able to absorb any interest payment defaults on its $300 billion debt that may emanate from Evergrande in both the short term and the long run.
“We believe the Chinese banking sector can digest an Evergrande default with no significant disruption, although we will be mindful of potential knock-on effects,” S&P said.
China Evergrande Crisis: Preventing a ‘Lehman Moment’ for the Country
Many analysts have maintained that the China Evergrande is not too big to fail, a phrase that suggests the company’s fall may not have so much of a pervasive impact on the broader economy.
Analysts from Citigroup Inc (NYSE: C) said Chinese authorities will do all they can to prevent a ‘Lehman Moment’ that may be sparked from China Evergrande. The analogy was borne out of the collapse of the Lehman Brothers Investment Banking firm which collapsed due to the continuing subprime mortgage crisis back in 2008. The Lehman Brothers sent shockwaves into the financial ecosystem, a situation Citi analysts believe China will do all to prevent.
“Beijing will take action to prevent the Evergrande crisis from becoming a ‘Lehman Moment’ for the nation, but some banks may become victims, analysts including Judy Zhang wrote in a note. “Policy makers 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.”