Test2 KP - China | Will the fall of Evergrande lead to a systematic breakdown?

Summary

We display the recent Evergrande crisis, discuss the possibility of default and the possible reactions by the authorities. We also conclude it will not lead to a systematic risk to the whole economy.

Key points

• Key points:
• Evergrande is the victim of the regulators’ ever-tightening efforts to clamp down the property market bubbles, such as the "Three Red Lines". China's deleveraging is proceeding in four phases. The latest stage of China's deleveraging started in the aftermath of the Covid-19, a series of credit events including Huarong Asset management Co. and property developer Evergrande have sent severe shocks to both the offshore and onshore markets.
• The contagion effect currently goes to other real estate developers, domestic and global financial markets. Huarong’s case reflects the authorities’ concerns of systemic risks. Although introducing strategic investors could help Huarong to honor its debt payment in the short term, it is still possible for those debt holders to accept a certain haircut of their holding debt in the long run.
• We indeed expect a default scenario for Evergrande, that means, it is not “too big to fail”, unless there is an unexpected positive development such as selling their valuable assets.
• Evergrande is unlikely to be bailed out directly by the government. Instead, the authorities will likely form a debt-payment committee composed of government representatives and important debt holders.
• The crisis will not lead to systematic risk for the whole economy, after our analysis on the exposure of the housing sector to four sectors including government, corporates, banking and household.

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