The thought of a Lehman Brothers-esque collapse in China sent U.S. investors running for the exits Monday.
The Dow Jones Industrial Average (^DJI) sank 614 points, while the S&P 500 (^GSPC) fell 75 points and the Nasdaq Composite (^IXIC) plunged 330 points. It was the market’s worst one-day slide in months and shattered an extended stretch of calm for stocks. The S&P 500 hadn’t fallen more than 1% since mid-August.
Investors were rattled by news that the major Chinese real estate developer Evergrande, is close to defaulting on a mountain of debt and worried that Beijing will allow the company to crash and burn.
Brian Levitt, global market strategist at Invesco, told Yahoo Finance Live that China’s economy has too much at stake to let that happen.
“We believe the social pact between the government and its people is going to drive an outcome here that’s not going to lead to a Lehman Brothers-type moment,” he said.
"Evergrande probably is too big to fail, and the impact a default on these bonds would have on the Chinese banking system and the suppliers could be quite large," said Levitt. "So we would expect the Chinese authorities to step in and work through a restructuring in order to bridge through this moment without a more significant incident occurring."
Evergrande is one of China’s largest lenders. It owes a staggering $300 billion in debt, more than any other publicly traded property developer in the world, and has become the poster child of an overheated Chinese real estate market.
China’s crackdown on debt and Evergrande's woes also caught the eye of the Biden administration.
During Monday’s White House briefing, press secretary Jen Pskai said, “This is a company based in China whose activities are overwhelmingly centered in China. That being said, we always are monitoring global markets, obviously from the Department of Treasury primarily, including the assessment of any risk to the U.S. economy and stand ready to respond appropriately if needed.”
Evergrande is an important part of China’s economic engine. With over 120,000 full-time employees and countless suppliers, Levitt said there’s too much at stake for China to let the company collapse.
“It just doesn’t seem to me that that’s going to be [Beijing’s] approach to let the company go down without any type of support for the creditors or the financial system,” he said.
Giles Coghlan, chief analyst at HYCM, told Yahoo Finance Live he believes Evergrande will be bailed out or at least allowed to fail “in a structured way,” but he said the bigger issue for investors is China’s continued clampdown on the capital markets.
“If President Xi’s moves against Tencent (TCEHY), Alibaba (BABA), as well as Evergrande, is this President Xi trying to roll back a decade-long move towards western style capitalism?” Coghlan asked.
“I think that’s the outlying risk that investors will be concerned about,” he added. “I think this [Evergrande] crisis will move along. I think it will fade into the background, and markets will recover pretty quickly, but the wider issue – is this a bigger move from President Xi?”
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