Thought to do a post on Evergrande given the market carnage, and why I don’t think Evergrande will be a Lehman-like event:
- China’s central bank is the strongest in the world and has practically unlimited policy options to prevent contagion. They can inject cash, ask banks and other companies to take over, or soften regulations on leverage. This is a controlled fire started by the regulators themselves, which they are highly unlikely to lose control over.
- China has much more control over their banks and currency than say the U.S. or Europe. And unlike the westerners, China did not unleash massive stimulus and still has a huge boozaka to tap on if needed.
- Xi is preparing for his third term in late 2022. The chaos caused by millions of ordinary Chinese people losing their investments or jobs will not look good. He will need to be known for stability and economic growth.
- It may not be well-remembered, but Huarong, a Chinese bank, also nearly went into default. The Chinese authorities waited till the last minute to announce their bailout. Some sort of rescue plan for Evergrande is likely to come at the 11th hour too. An interesting note was that the CEO of Huarong was executed. Not something you see in the West, where not a single executive was charged for the financial crisis. There are some serious consequences if you don’t cooperate in China.
Don’t hold your breath for a quick outcome. Things are likely to drag out and take place over months or even years. And it takes time to cobble a rescue together. In the meantime, I simply don’t see how or why the Chinese will let it go out of control. Early prevention is a lot better and cheaper than digging themselves out of an actual collapse. Will be a massive lose of face too, something unthinkable to the Chinese.
Most likely it will be a controlled event where Evergrande’s shareholders and some investors are crushed, but cross defaults limited. China allowing contagion to spread would cause the very thing that they are seeking to prevent.
Just a comment that most people and Western media actively want China to have their own Lehman event. But China is a vast country that has a government which is fairly effective, often much more so than the West. I don’t think China will give them the satisfaction.
Personally I would take this as a buy the dip moment. I am woefully short of cash though, and annoyed with myself for injecting so much on the eve of a crisis. It also irritates me with the amount of nonsense flooding the media and YouTube commenters.
I’m a little tired due to a bout of insomnia, and but wanted to provide quick clarity that the fear out there is not justified. Let me know your thoughts too.