Is China Headed For a ‘Lehman Brothers Moment’?
September 17, 2021
Thirteen years ago this week Lehman Brothers collapsed. While the banking giant’s collapse was not the sole cause of the financial crisis, it was an inflection point that sent shockwaves throughout the entire financial system.
Now, economists are having flashbacks watching the potential collapse in China of the massive property developer Evergrande. The implosion of the massively overleveraged company, which has a staggering $300 billion worth of outstanding debt, could set off a chain reaction that could spread throughout the nation’s economy and potentially impact global markets.
Evergrande’s size alone means default would be widely felt throughout the country. The company employs more than 200,000 employees, took in more than $110 billion in sales last year, and has more than 1,300 developments. In a note to clients, Yardeni Research warned that Evergrande’s collapse could have “systemic risks on par with the Lehman Brothers demise had on the U.S. stock market.”
Wall Street is closely monitoring the situation, which serves as a potential proxy for how China will be able to manage the massive amounts of debt taken on by both companies and households.
Most analysts remain optimistic that any fallout from the situation would be unlikely to impact the U.S. markets, and would likely be well contained by Beijing’s vast control over the economy. Aside from market risk, Evergrande’s collapse could have big consequences for China’s economic growth. Real estate development has been a major catalyst for growth in China over the last decade. A pronounced slowdown in the world’s second-largest economy could have consequences for global growth.