The Evergrande debt crisis has been causing a sharp sell off in equity markets as China’s second largest property developer looks like it may crash under a mountain of debt. If you are wondering what the significance will be of Evergrande’s debt crisis here are a few thoughts, beyond the actual crisis itself.
Firstly, this is not a huge surprise. Evergrande has been falling slowly over the last 6 months, losing nearly 85% of it’s value during that time. China has been spending huge amounts in recent years to boost their domestic GDP. There has been an over emphasis on real estate for some time. Construction, with leverage, has meant that Evergrande’s $300 billion debt pile has been a product of Chinese drive for growth. It is a huge company with a presence in around 280 cities and over 1200 projects. However, it is also a company reflecting some of the weaknesses with China’s drive for growth.
This could impact the Fed. If Xi Jinping allows Evergrande to collapse, then the Fed are more likely to not hint at bond tapering for November. The Fed may not want to add to speculation about rising US interest rates as that would weigh on stocks in the near term. This latest move may prompt a wait and see approach.
The other interpretation is that President Xi is wanting to avoid the danger of moral hazard. Namely the belief that companies can take whatever risks they want as the state will always bail them out. In this sense Evergrande will be allowed to fail as a warning to other companies who might follow the same path. This final point is not really a standalone point, but one that can dovetail into others. However, it is worth noting.
If there is a sudden collapse of Evergrande then global stocks should sell, bonds find bids, commodities fall and gains into JPY, CHF and the USD.
By Kamran Wadud
