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Could China’s Evergrande Collapse Lead To New Global Recession?

Chinese real estate giant Evergrande’s financial crisis could spark a new world recession. Credit: Double8TwoN , Creative Commons Attribution-Share Alike 4.0

China’s Evergrande Group’s debt crisis has led market analysts to whisper about a new “Lehman Brothers moment” in the world economy. The Chinese real estate giant has warned for months that it would be unable to fulfill its loan tranches in September, but the Chinese state has done nothing in terms of a potential bailout for the company.

The effect of the Evergrande debt crisis had an immediate effect on global markets, with the Indian stock exchange being the first to see a drop on its index, with the American Dow, Nasdaq and S&P 500 following suit with a close to 2% drop (although they later recovered most of their losses).

China’s Evergrande collapses, Lehman whispers

Evergrande shares fell 4% as focus there shifts to Thursday when the company is due to make bond interest payments, amidst its deep liquidity problems. This has led to widespread speculation that a potential Evergrande default could affect the world’s second-largest economy and possibly lead to a house of cards event, similar to the one the Lehman Brothers collapse led to in 2008.

The crisis has been brewing at Evergrande, China’s second-largest real estate company, for months and the company had warned that it was facing a liquidity crunch that has left it without money to pay off its debt obligations, which cumulatively stand at over $300 billion, equivalent to 2% of China’s GDP.

The company has been downgraded multiple times by ratings agencies and has seen its share price plummet nearly 80% this year. The risk that Evergrande would likely default on upcoming payment obligations was highlighted in September when Chinese authorities reportedly told banks not to expect the company to clear interest dues.

Economists soothe fears, hinting China could bail out Evergrande

Almost as soon as whispers about a potential new world recession started, economists from around the world tried to ease investors’ fears by pointing out the significant differences between the Lehman Brothers of 2008 and Evergrande of 2021. “This appears far-fetched now since Evergrande’s debt is not widely held and, therefore, is unlikely to lead to a contagion with systemic risks. The recovery in Dow is an indication of market’s confidence that a contagion is unlikely,” said V. K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

There is also the hope that, despite its new 2020 market regulations which limited the amount of debt a Chinese company can acquire (in an attempt to minimize the country’s debt), the Chinese state will jump in at the eleventh hour and manage the fallout.

“Evergrande is such an important real estate developer, and it would be a strong signal if anything happened to it. I believe there will be some supporting measures from the central government, or even the central bank, trying to bail out Evergrande,” Dan Wang, an economist at Hang Seng Bank, was quoted as saying by CNBC.

Nevertheless, investors around the world appear cautious at the moment, probably awaiting Thursday’s developments before resuming their optimistic business in the international stock exchanges. Once bitten (by Lehman), twice shy.

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