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China is facing a potential Lehman moment. Wall Street is untouched

China is facing a potential Lehman moment.  Wall Street is untouched

The risk is that the collapse of Evergrande, a Chinese real estate company with a staggering $ 300 billion in debt, could trigger a chain reaction spreading abroad.
“Some fear that an Evergrande collapse will have systemic risks on a par with the impact Lehman Brothers’ death had on the US stock market,” Ed Yardeni, chairman of Yardeni Research, wrote in a note to customers on Thursday.
Like Lehman in his heyday, Evergrande is massive, suggesting that a standard will be widely felt. The company has 200,000 employees, raised more than $ 110 billion in sales last year and has more than 1,300 developments, according to Reuters.

Wall Street is keeping a close eye on the Evergrande situation, highlighting the extraordinary amount of lending to Chinese businesses and families over the years. Still, there is no evidence that investors believe an Evergrande standard will infect US markets or the domestic economy.

No infection, at least so far

For now, investors seem convinced that the Beijing authorities would use their vast control over the Chinese economy to limit the damage. And there is no evidence, at least so far, of infection in the US markets.

“I do not think the Evergrande collapse and the economic problems of Chinese real estate companies will have a greater impact on the US economy or markets,” Mark Zandi, chief economist at Moody’s Analytics, told CNN.

“We believe the narrative of ‘China’s Lehman Moment’ is wide-ranging,” Simon MacAdam, senior global economist at Capital Economics, wrote in a note Thursday.

MacAdam said even a “messy collapse” of Evergrande would have “little global impact beyond some market turmoil.”

David Kotok, co-founder and chief investment officer of Cumberland Advisors, agrees, dismissing Evergrande as a “Chinese domestic credit problem.”

“It does not appear to have any contagious effect on U.S. companies or U.S. financial markets,” Kotok said. “We see no credit spread increase,”

Credit spreads, the difference between corporate bonds and ultra-secure government bonds, are still very narrow. This is a sign that investors are not worried – especially given the Federal Reserve’s unprecedented support for the economy and markets. That, of course, can change with a heartbeat.

“I would change my mind immediately if I saw contagion or overthrow” into the world’s largest economies, Kotok said.

The U.S. Treasury Department declined to comment on the Evergrande situation.

Growth engine to slow

In addition to the market impact, the collapse of Evergrande could affect China’s economy, the second largest in the world after the United States, and an important catalyst for global growth.

Evergrande has already suspended work on some projects to save money. Given the size of the company, it will put pressure on China’s real estate market.

“Real estate development has been a major growth engine for the Chinese economy over the past decade,” Guy Lebas, chief real estate strategist at Janney Capital Management, told CNN in an email.

The Delta variant has hit China's economy hard.  Now a property crash is threatening

He said the lack of large-scale real estate development could slow China’s economy, although there is debate about how productive growth was in the first place.

“While there may be modest knock-on effects in other economies, I do not expect them to be too great,” Lebas said.

‘I do not know if China can have a Lehman moment’

Wall Street’s cautious optimism is driven by the fact that Beijing’s authoritarian government has a huge influence on what happens in China’s economy, financial markets and banking system. Consider Beijing’s recent crash on everything from video games and casinos to sharing tours.

“If it looks like one or more standards could ignite a financial crisis, Chinese authorities would almost certainly prevent this from happening,” said Zandi of Moody’s.

Kotok pointed out that the government of China controls the road rules right down to how much credit is given to different parts of the economy.

“I do not know if China can have a Lehman moment,” Kotok said.

Although Yardeni does not expect Beijing to rescue Evergrande, he does see the government injecting enough liquidity to limit the damage.

“Or at least we hope so,” he said.


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