Amid ‘Lehman Moment’ Debate, Evergrande Faces Ponzi Innuendo

Amid ‘Lehman Moment’ Debate, Evergrande Faces Ponzi Innuendo

Equities looked to stabilize Tuesday after a somewhat harrowing day on Wall Street, where stocks kicked off a crucial week with steep losses tied to Evergrande concerns and exacerbated by mechanical selling flows.

Opinions vary on how the end game will unfold for Evergrande. Although the consensus is that this isn’t a “Lehman moment,” that’s a pretty high bar — or a pretty low bar, depending on how you want to look at it.

Irrespective of projected recoveries (or not) and related losses, there’s no question as to whether Beijing has the capacity to backstop the system. “The Chinese government… has almost unlimited financial power [and] could intervene anytime to stop the panic,” Macquarie’s Larry Hu and Xinyu Ji said. They noted that 1.9 trillion yuan in annual profits and 5.4 trillion yuan in provisions likely means China’s banking system “could easily absorb the loss from Evergrande.”

The risk, Macquarie went on to remark, is a “self-fulfill[ing] liquidity crunch [in] other highly-leveraged developers,” but that too is “is containable if the government eases controls on credit flows” to the property sector.

Of course, that’s not necessarily something Beijing is keen on right now. China is actively attempting to institute property curbs, which is part and parcel of every “good” hard landing scenario.

The Hang Seng property gauge managed to rebound Tuesday after an egregious rout to start the week. It closed 3% higher (figure below).

Amusingly, Sun Hung Kai Properties said it doesn’t know anything about “rumors” that Beijing is pressuring Hong Kong’s property tycoons to fall in line with Xi’s “common prosperity” initiative. In a statement, Sun Hung Kai said that although the company “hasn’t heard of such information,” it “never agrees with monopolistic behaviors.”

In a testament to — and I don’t know any other way to put this — Bloomberg’s desire to maintain a media presence in Hong Kong and Beijing, a Tuesday article dutifully treated the statement from Sun Hung Kai (and related remarks from The Real Estate Developers Association of Hong Kong) as though it can be taken at face value. “Hong Kong’s biggest developer and a real estate industry group poured cold water on the notion that the Chinese government is putting pressure on the city’s developers,” Shawna Kwan wrote. That’s wholly laughable. Let’s see what city developers have to say about the situation in the event Beijing officially releases a new decree.

For her part, Carrie Lam didn’t seem particularly zealous about denying the “rumors.” While briefing the media Tuesday, she said the Party in Beijing attaches “great importance to livelihood issues in Hong Kong” and noted that the government can legally “take over” private property from developers in order to build public housing. In such cases, developers are “willing to cooperate.” Asked about reports that Beijing had pressured city developers directly, she declined to comment.

In any case, S&P suggested Beijing may not intervene in an Evergrande restructuring. After noting that Evergrande’s trials and tribulations “could have wide-reaching negative ramifications for other developers, suppliers and contractors, and the banks and financial institutions that lend to them,” S&P said that,

Evergrande’s difficulties are playing out just as China Huarong Asset Management is in the middle of a recapitalization exercise. This means that two of China’s largest bond issuers of offshore debt may be both testing the capacity and appetite of the government to backstop potentially substantial failures.

We do not expect the government to provide any direct support to Evergrande, and have therefore not factored this into our analysis. It is a privately owned company in a highly commercialized sector. 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. Evergrande failing alone would unlikely result in such a scenario.

Wall Street is now pretty adamant about the contention that this isn’t a doomsday scenario. “So, is this China’s Lehman moment? Not even close, in our opinion,” Barclays said. Another major Wall Street bank said policymakers in Beijing “will likely uphold the bottom line of preventing systematic risk to buy time for resolving the debt.” A UBS strategist reminded market participants that “when you try to reduce moral hazard after four major credit cycles, it’s going to be messy.” “I don’t think this is a Lehman moment,” he added. And so on.

The world’s richest banker doesn’t necessarily agree, though. “Evergrande seems like China’s Lehman moment,” Uday Kotak, CEO of Indian lender Kotak Mahindra Bank, said, in a tweet (below).

Evergrande’s shares managed to avert another large daily loss, falling just 0.4% in Hong Kong trading. Of course, once you’re as close to zero as Evergrande is, there’s not that much further shares can fall.

Meanwhile, FT reported that Evergrande may have used retail investors to plug holes as the Titanic took on water.

Citing company executives, an article out Tuesday said Evergrande raised billions selling products to retail investors and used the funds to bridge gaps and also repay other wealth management products.

There’s a name for that kind of business model.

Evergrande didn’t initially respond to FT‘s request for comment.


7 thoughts on “Amid ‘Lehman Moment’ Debate, Evergrande Faces Ponzi Innuendo

    1. Takeaway: Abundant cheap credit fuels speculative behavior and encourages ostensibly rational parties to act irrationally, leading to bubble valuations in various asset classes. Attempts to regulate irrational behavior inevitably lead to the bursting of those bubbles, resulting in economic disaster (deep recession, or worse). Having absorbed that lesson, regulatory authorities over the last decade have studiously avoided doing their jobs, preferring, as the saying goes, to kick the can down the road. The Carnegie piece argues that the CCP, despite its declared intentions, has no choice but to follow suit, and that it and CBs in the US, UK, and Eurozone will continue to kick the can down the road as long as they can. Again, the alternative is economic disaster.

        1. If the outlook is some version of stagflation – slower growth and higher inflation relative to pre-pandemic, let’s say for sake of argument the US is 0% real GDP and 3% inflation – what do we like for investment approach? Equities, fixed income, “real assets”, other?

  1. Why is there such confidence in China’s government to pull just the right puppet strings. The road to hell is paved with good intentions. There is a lot of hubris that the govt can get this right. That may turned out to be true. But has they say “things happen.”

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