Is Evergrande Actually China’s Lehman Brother’s Moment?

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As US President Biden returns from his recent visit Asia There was one country he did not visit that has significant global economic implications; China. The Great Recession and the Asian Financial Crisis are still fresh in the minds of many and a potential global recession looms large in view of geopolitical tensions, lockdown Due to a global pandemic in China, China’s Evergrande Group is possibly defaulting on its loan of, This month, Evergrande’s onshore unit won bondholder approval Pay seamlessly Due six months on May 6 on the two yuan notes, according to a filing to the Shanghai Stock Exchange. The group will unveil a debt restructuring proposal to its creditors by the end of July, but reputational damage has already been done.

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One can’t help but ask “Is this another Lehman Brothers moment?” While the defaults of Evergrande, Shimao and other real estate developers could lead to an economic downturn and the loss of more than 250 million Chinese jobs, there is still one thing that can stop it, the Chinese government. The Chinese Communist Party (CCP) specializes in creating a well-planned response and uniting people behind a common cause.

In 2008, Lehman Brothers Holdings Inc. officially filed for bankruptcy. Due to risky investments, wild speculation and the belief that the real estate market cannot go down. This singular event catalysed the Great Recession which was responsible for an estimated $10 trillion in economic output. The global economy eventually recovered but many people’s homes and retirement savings were gone forever. From 6th December, 2021, China Evergrande Group has been in technical lapse. Many fear this could lead to the collapse of the Chinese real estate market and wipe out billions of generational wealth. These similarities have led people to label it as the downfall of China’s Lehman Brothers, but is it really?

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America’s real estate crash and economic backlash could provide important lessons for China. Its response eventually led to economic recovery and has been extensively analyzed over the past decade. One potential program that may be of significant interest is Troubled Asset Release Program (Tar
a R
P). Essentially, the Federal Reserve would invest in failed corporate institutions through company stock and preferred stock with guaranteed dividends. A TARP program in China can offer a high chance of success. They can stabilize these developers by targeting loans with the highest probability of default. A high priority item would be to deliver apartments they’ve already sold, but haven’t built yet.

The Chinese government has given mixed messages to help Evergrande. Beijing has been reluctant to lend its support for fear of a public backlash from those who might want a bailout. At other times, however, CCP has stepped in and increased control over the Evergrande Group, something they may do with other developers, fearing public unrest over the housing crisis. China saw the protestA rare occurrence in China, outside the Evergrande Group’s headquarters in Shenzhen sparked public outrage over the situation, and the current lockdown This anger has been fueled in China itself. In China, households can easily represent 45% of household net worth. In some tier three and tier four cities, it’s more like 70%compared to only 27% in the US

Where the potential default could continue is $20 billion in foreign bonds. After a group of international investors threatened to proceed with legal action that could include the liquidation of the company’s assets, several banks moved to forfeit $2 billion from one of Evergrande’s major subsidiaries. March 22, This could make the situation worse, with Evergrande having previously responded that they “sincerely ask all offshore creditors to give us more time.” Chinese investors have been given priority over loans and deliverables, and offshore investors will either have to wait or possibly write off losses as bad debt.

real estate It accounts for about 25% of China’s GDP and has been a major driver of growth. Beijing needs to strike the right balance to support Evergrande, while at the same time not enabling a moral hazard in which the government protects any company from defaulting on its debt. Lessons learned from the US Financial Crisis will reveal what works and what keeps corrupt systems afloat. CCPs should support corporations through assistance in debt restructuring and promoting better governance and reporting mechanisms, prioritizing the distribution of investments made. With a focus on ordinary Chinese investors and President Xi’s “general prosperity“Subject, Beijing should develop an environment that fosters greater trust, transparency and increased financial responsibility.

earl carry CJPA is the founder and CEO of Global Advisors and editor of the new book “From Trump to Biden and Beyond: Redefining US-China relationsMr. Carr is also an adjunct instructor at NYU’s Center for Global Affairs.

special thanks to James Hinot Geopolitical Analyst at CGPA Global Advisors along with her exceptional research and editorial skills pengyu luSenior Advisor at CJPA Global Advisor, to provide timeline of events.

Credit: www.forbes.com /

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