Is the Evergrande meltdown China’s Lehman Brothers moment?

The images of hundreds of employees with boxes in their hands marching out of the New York City headquarters of Lehman Brothers after the company declared bankruptcy on September 15, 2008 became one of the enduring images of the global financial crisis, a visual shorthand for how an industry-leading firm can come to ruin and pull a nation — and the world — down with it.

Now, the images of disgruntled China Evergrande Group investors, employees and vendors camped outside the firm’s headquarters in Shenzhen in recent weeks have the potential to become a shorthand of their own.

The real estate firm is in serious trouble. On Monday, it failed to make interest payments to at least two of its largest bank creditors, Bloomberg News reported. It has a roughly $83.5m dollar-bond interest payment due on Thursday and faces another $47.5m dollar bond interest payment next week.

Investors are worried an Evergrande debt default could send shock waves through the Chinese and global economies, much as Lehman Brothers did to the United States and the world in 2008.

What is less clear is to what lengths the Chinese government is willing to go to stave off the potential social and financial upheaval of a messy Evergrande collapse.

Fears over a possible debt default affecting broader markets calmed partially after Evergrande said in a filing on Wednesday that it had “resolved via negotiations” an interest payment on one of its bonds that is due on Thursday. But the company failed to detail how much interest would be paid or exactly when, which could signal that it simply managed to postpone the payment that’s due, according to Bloomberg News.

Nerves steadied further on Thursday after Bloomberg News reported that Beijing regulators told the embattled property developer to avoid an imminent default on its dollar bonds.

This week, the People’s Bank of China lubricated credit conditions in China’s banking system by pumping additional short-term cash into it.

And on Thursday, The Wall Street Journal reported (paywall) that authorities in China had asked local government officials to get “ready for the possible storm” that could follow a potential Evergrande collapse.

The company’s fate – and whether it could yet prove to be China’s Lehman Brothers moment – is still far from certain.

Here’s what you need to know.

Recap. What sort of firm is Evergrande?

Evergrande currently holds the dubious title of the world’s most indebted real estate developer. Founded in 1996 by Hui Ka Yan, it has grown into one of the biggest firms in China and has in the process made Hui the 53rd richest person on Forbes’s Billionaires 2021 list and the 10th wealthiest on its China Rich List 2020.

The company currently has 1,300 real estate projects in 280 cities in China, according to its website, and is also involved in electric vehicle production, property management, film and TV production, theme park construction, life insurance, healthcare, football and food and baby products.

In a sign of how its non-property businesses are suffering, Bloomberg News reported on Thursday that Evergrande’s EV unit has not paid some employees and is behind on paying some of its factory equipment suppliers.

So how badly in debt is Evergrande?

The company has $300bn in liabilities and its leadership has made it clear it doesn’t have the means to pay its various creditors on time.

That has investors inside and outside of China majorly worried, including about a potential contagion effect.

What is that?

Simply put, it’s the fear that turmoil or crisis in one large company or country could spread to others. When Lehman Brothers filed for bankruptcy, for example, it had a contagion effect on the other major financial institutions with which it had trading relationships.

It turned out that the US banking industry was made up of a relatively small number of players whose assets, interests and fates were more closely intertwined than many thought. When Lehman fell, it sent shock waves through many other firms in the US and beyond.

And thanks to globalisation, the links between entire countries’ economies are stronger and more numerous than ever before, so when the US experienced its 2008-2009 financial crisis, the ripple effects were felt in markets all over the world.

Similarly, as China is the world’s second-largest economy, what happens in China with Evergrande has the potential to affect financial institutions and nations around the world.

Is the Evergrande saga already having a ripple effect?

It certainly roiled markets earlier this week. Hong Kong’s Hang Seng Index fell 3.3 percent on Monday, and its properties index fell a whopping 6.69 percent to hit a 52-week low. Both the broader index and the properties index closed up on Tuesday, however.

Similarly, US stocks saw their biggest drop since May on Monday, fuelled partly by Evergrande anxieties.

Evergande jitters also spilled over into the world’s largest cryptocurrency, Bitcoin, which sank all the way down to $40,468 on Monday, according to CoinMarketCap.

Will we definitely see a contagion effect in China’s banking sector?

Nothing is ever certain in the markets. But on Monday, S&P Global Ratings weighed in with its assessment.

“We believe the Chinese banking sector can digest an Evergrande default with no significant disruption, although we will be mindful of potential knock-on effects,” S&P Global Ratings credit analyst Ryan Tsang said in a report. “Evergrande is small relative to Chinese banks’ total loans. The banking sector’s direct exposure to Evergrande also appears well distributed.”

What about other Chinese property firms?

“We expect the default risks of weaker, highly leveraged property developers to rise,” wrote S&P Global Ratings credit analyst Christopher Yip in the same report.

What about smaller investors?

They are very concerned, so much so that retail investors, vendors and even Evergrande employees have gathered outside of the firm’s offices in China to demand repayment of loans and other financial products.

Aren’t those kinds of protests unusual for China?

You bet. China is a country that prizes social stability. But some analysts see that as a reason for the government to step in and contain the potential fallout that could hurt the little guys.

“[The protests] are all the more reason for them to try to patch up what they can with this Humpty Dumpty,” Edward Yardeni, president of Yardeni Research, told Al Jazeera.

“Humpty Dumpty is having a great fall, and if anybody can kind of glue it back together again to a certain extent, it’s the Chinese government, because they do have so much control,” he added. “I think they do fear that there will be more eggshells breaking if they don’t deal with this one right away.”

Why wouldn’t China bail out Evergrande?

Governments are always worried that if they step in and bail out firms that have engaged in reckless behaviour — such as taking on way more debt than they can handle — then it signals to other large firms that they can behave just as badly because the government will always be there to throw them a lifeline. This is what economists call “moral hazard”.

Also, China’s government has been trying to cool off the country’s property market and lessen its importance to the overall economy. One way to do that is to rein in excessive borrowing by developers like Evergrande.

What does the future of China’s property market look like?

The industry as a whole may see trouble ahead due to declining housing demand and the changing demographics of China, where the population is ageing fast.

“The root of Evergrande’s troubles — and those of other highly-leveraged developers — is that residential property demand in China is entering an era of sustained decline,” wrote Capital Economics chief Asia economist Mark Williams in a September 15 note.

So is Evergrande China’s Lehman Brothers moment?

That’s the $300bn-dollar question. Analysts at Citigroup and Barclays Bank have come out saying they don’t believe so. Neither does Yardeni.

“I don’t think it’s going to be a Lehman Brothers moment because Lehman was not bailed out. The US Treasury and the Fed made a very conscious decision not to bail out Lehman — they didn’t appreciate the extent to which its failure would cause global repercussions,” Yardeni said. “I think the Chinese government is very well aware of what the risks are with regards to Evergrande. I don’t think they will bail it out so much restructure it.”

But on Tuesday, one of the world’s richest bankers, Uday Kotek, tweeted that “Evergrande seems like China’s Lehman moment.”

Kotak, the CEO and founder of Indian lender Kotak Mahindra Bank, likened the Evergrande saga to the fate of India’s Infrastructure Leasing & Financial Services Ltd, which he helped oversee the restructuring of after it defaulted on its debt.

Evergrande seems like China’s Lehman moment. Reminds us of IL&FS. Indian Government acted swiftly. Provided calm to financial markets. The Government appointed board estimates 61% recovery at IL&FS. Evergrande bonds in China trading ~ 25 cents to a $.

— Uday Kotak (@udaykotak) September 21, 2021