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Sept. 20, 2021, 10:15 p.m. EDT

Will Evergrande be China’s ‘Lehman moment’? Wall Street says no

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By William Watts

Problems at Evergrande, China’s teetering property giant, are stirring unwelcome memories of the market chaos that followed the implosion of Lehman Brothers roughly 13 years ago. But Wall Street analysts and economists, defying any fears of uttering what could become famous last words, argued that the comparisons don’t hold up.

In fact, analysts at Barclays argued that speculation the Evergrande saga could become China’s “Lehman moment” was far off base.

“Not even close, in our opinion,” they said, in a Monday note.

“Yes, Evergrande is a large property firm. And yes, there could (probably  will ) be spillover effects on China’s property sector, with economic implications. And yes, it comes at a time when China’s growth has already started to disappoint,” they acknowledged.

See: Evergrande fears sink stock market: Here’s what investors need to know about the teetering property giant

“But a true ‘Lehman moment’ is a crisis of a very different magnitude. One would need to see a lenders’ strike across large parts of the financial system, a sharp increase in credit distress away from the real-estate sector, and banks being unwilling to face each other in the interbank funding market,” the analysts continued. On top of that, Chinese authorities would need to make a series of policy mistakes in response to the crisis.

Related: Evergrande’s potential debt blowup is ‘not a contagion’ event for the stock market, says the man who said the firm was insolvent 10 years ago

So far, those types of spillovers, or contagion, in economist lingo, remain absent, analysts said.

Bond-market spillovers, so far, have been largely limited to a few high-yield developers, noted Wei Yao and Michelle Lam, analysts at Société Générale, in a note. Major lenders to Evergrande have come under pressure in the stock market, but their borrowing costs have seen little change, the economists noted, while also observing relative calm in China’s money markets, though some early signs of cash hoarding had begun to emerge.

As for the bond market, it seems investors “are differentiating between safe and risky borrowers and expecting limited spillover to the wider financial market for now,” wrote the SocGen economists. They noted that the IBoxx China real estate high-yield index, which tracks the sector’s offshore bond performance, had dropped by nearly 20% year-to-date through last week, with the selloff concentrated across the few risky borrowers, including Guangzhou R&F and Fantasia.

Meanwhile, the sector’s investment-grade index had remained largely stable, they noted. It was a similar story onshore, they said, with credit spreads of lower-rated real estate bonds widening, as investors demanded more of a premium to offset risks, while spreads for higher-rated bonds remained steady. The effect on the broader corporate bond market was even more muted.

That said, jitters around the Evergrande situation were blamed for weakness across global equities and other assets viewed as risky, sending investors into traditional havens, including Treasurys.

While other factors were also seen at play, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.02% closed with a loss of more than 600 points , or 1.8%, on Monday afternoon, after tumbling 972 points at its session low. The large-cap benchmark S&P 500 /zigman2/quotes/210599714/realtime SPX +0.30% ended the day down 1.7% and the tech-heavy Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.62% slumped more than 2%.

The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -1.13% fell nearly 7 basis points to 1.306% as investors sought out safety in government paper. Yields fall as debt prices rise.

The collapse of Lehman Brothers on Sept. 15, 2008, triggered a market meltdown and a seizing up of credit markets that threatened the global financial system, sparking an emergency response from global policy makers.

Investors, meanwhile, have long fretted about China’s highly leveraged real-estate market, though expectations that Chinese authorities would provide a backstop have ameliorated those fears in the past. Heavily indebted Evergrande has proven vulnerable as Beijing clamps down on debt-fueled speculation.

And China’s economy is “overly dependent” on the real-estate sector, the SocGen economists said. A recent National Bureau of Economic Research working paper estimated that real estate’s contribution to the economy stood near 30%, much higher than every other major economy, including the U.S. at 15%, the U.K., at around 20%, and even higher than Spain before the financial crisis, they noted.

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