China won't face 'Lehman moment' with Evergrande, say analysts

NEW YORK • Investors unnerved by the fallout from China Evergrande Group were gauging the potential for a wider shakeout after a sell-off hit stocks around the world on Monday.

For now, many US-based investors believe there is little chance that the woes of Evergande, the world's most indebted developer with US$300 billion (S$405 billion) in liabilities, could morph into a systemic crisis reminiscent of the 2008 collapse of United States investment banking giant Lehman Brothers.

Lehman went bankrupt as a result of excessive sub-prime mortgage lending, and the knock-on effects brought the global financial system to a standstill.

It is hard to see how this Chinese developer - which is massive but only about half as indebted as Lehman was - would trigger another global financial crisis, especially as China has "no interest in staging their own Lehman", wrote Bloomberg editor John Authers.

"Another reason to expect the Chinese government to do something to ensure an orderly process is that they have no choice. To use another familiar phrase from the Lehman debacle, Evergrande is far too big to fail," he added.

Beijing will take action to prevent the China Evergrande Group crisis from becoming a "Lehman moment" for the nation, but some banks may become victims, according to analysts at Citigroup.

Analysts including Judy Zhang wrote in a note: "Policymakers will likely uphold the bottom line of preventing systematic risk to buy time for resolving the debt risk, and push forward marginal easing for the overall credit environment."

Growing investor angst about Evergrande and a crackdown on China's real estate sector have caused a chain reaction across global risk assets this week.

Still, with valuations on US equities stretched on a historical basis and an unwinding of the Federal Reserve's easy money policies looming, some worry that a sudden drop in risk appetite could leave global markets vulnerable to a broader sell-off.

"We have a very cautious view on the market, given elevated valuation levels," said Mr Rob Romero, portfolio manager at Connective Capital, a technology hedge fund with US$100 million in assets under management.

"It is hard to know how far the contagion will spread. We are looking for signs of resilience in the US market; if that doesn't happen, that means contagion has more risk to snowball."

The concerns over the extent of the Evergrande crisis' reverberations through the global financial system come at a time when high valuations in the equities markets had many investors and analysts calling for a pullback.

The benchmark S&P 500 traded at 21.6 times forward earnings as at last Friday, near its highest levels since the late 1990s dot.com bubble, and prior to Monday's trading had rallied more than 18 per cent for the year to date.

While Evergrande's woes have been playing out for several months, its shares tumbled more than 10 per cent on Monday as Chinese regulators warned that its US$305 billion in liabilities could lead to widespread losses in China's financial system if its debts are not stabilised.

Late payments by the company could trigger cross-defaults.

Worries over a broader default spread around the world, with the MSCI Global down 1.62 per cent, on pace for its worst performance in two months.

Investors rushed into havens such as Treasuries, taking the yield on the benchmark US 10-year to one-week lows.

In the US equity options market, traders appeared more intent on taking profits from existing hedges than on buying up protection against a sharper sell-off, even as the VIX, an index measuring volatility known as a "fear gauge", stood around its highest level in four months.

Mr Andrew Left, founder of Citron Research, which in June 2012 published a report that said Evergrande was insolvent and had defrauded investors, was not expecting widespread pain.

"I don't think that this is going to be the straw that breaks the global economy's back," he said.

REUTERS, BLOOMBERG