Evergrande’s liquidation crisis won’t be Lehman moment: China Beige Book

A liquidation order to property giant China Evergrande liquidation crisis this week deepened concerns about China’s struggling real estate sector — but analysts say the spillover will likely be contained, with one saying it might actually be “good news.”

Shehzad Qazi, chief operating officer at China Beige Book International, told CNBC on Tuesday that China will now be forced to absorb the liabilities of any large company failures, such as Evergrande, within the property sector in order to protect against wider contagion.

On Monday, a Hong Kong court issued a liquidation order to the embattled property developer after it failed to reach a restructuring deal with creditors.

“That is actually the good news — China’s non-commercial financial system ensures there won’t be a ‘Lehman moment,’ since the government effectively controls all of the intermediaries in the economy and can force them to continue to lend, supply, borrow, etc. In other words, no massive credit event,” Qazi told CNBC.

He was drawing comparisons to the collapse of Lehman Brothers in 2008 which led to a crash in financial derivatives, and eventually plunged the global economy into recession.

Qazi told CNBC’s “Street Signs Asia” on Tuesday that if fiscal stimulus measures in China were effective and large enough, they could lift sentiment and boost economic growth, which he believes will be slower this year than the last.

“Can you stabilize the property market? And then what is the nature of stimulus fiscal stimulus look like? Because monetary stimulus has quite frankly stopped working. It’s not effective in China,” he added.

China’s GDP came in at 5.2% in 2023, compared with a 3% increase in 2022.

China Evergrande, once among the country’s largest property developers, is the world’s most indebted company — with more than $300 billion in liabilities.

Despite months of delays, Evergrande was still not able to make concrete plans of restructuring, Hong Kong Justice Linda Chan reportedly said in court on Monday.

Still, fears of contagion from Evergrande’s likely downfall were relatively contained, even as its shares were suspended by the Hong Kong Stock Exchange after a 20% plunge on Monday.

China’s property sector is the bedrock of its economy, but massive piles of debt on the balance sheets of its major developers have led to serious defaults.

Country Garden, also one of the country’s largest developers, has struggled to pay off its own debt. The company reportedly said last month it may avoid a default on its yuan-denominated bonds after being deemed to have defaulted on its dollar-denominated debt.

“Given how many defaults have occurred, the vast majority were offshore, there usually aren’t cross default clauses that mean that these defaults offshore have to be recognized onshore,” Charlene Chu, China macrofinancial senior analyst at Autonomous Research, told CNBC’s “Squawk Box Asia.”

“A lot of the problems that we’ve seen in China’s property market with all of these defaults have actually not spilled over into any domestic financial instability,” Chu said.

Still, questions remain on whether China will recognize the Hong Kong court order for Evergrande’s liquidation — since most of the company’s assets are in the mainland.

Analysts at Commerzbank said: “Even if a court in mainland China recognizes the Hong Kong court order, Beijing’s more aggressive stance to contain risk as well as potential political considerations mean the fallout will probably be relatively contained.”

Correction: The headline of this story has been updated to accurately reflect the title of Shehzad Qazi.