Why Is Everyone Talking About Evergrande?

Why It Matters

Bondholders, stock investors and rating agencies had predicted an Evergrande default and said a debt restructuring is almost inevitable. Shockwaves are already being felt across global stock markets, triggering losses even in companies with no clear link to China or property. But authorities in Beijing are expected to engineer a resolution, rather than allow a chaotic collapse into bankruptcy.

The state runs most of the banks and can exert pressure on creditors, suppliers and other counterparties, keeping systemic risk to a minimum. While Evergrande investors would recover only a small portion of their money, the company’s operations would remain protected and unfinished properties would be delivered to their owners.

An uncontrolled downward spiral, on the other hand, could prove catastrophic for China’s economy, one of the major engines of global growth. Aggressive controls to curb outbreaks of Covid-19 are already hurting retail spending and travel in China, while measures to cool home prices are taking a toll. A correction in China’s property market, which comprises 28% of China’s economy and 40% of household assets, poses a risk to social stability.

In a worst-case scenario, Evergrande-related stress spreads across the world’s financial system and freezes the global credit market. That would be China’s Lehman moment, risking a repeat of the global financial crisis and dragging the global economy down with it. Think a real estate crash, surging unemployment, lower wages and protracted economic recessions. China has a lot of tools to prevent that, of course, and much of Wall Street believes Beijing will use them if necessary.