When Evergrande’s $300 billion (£226 billion) debt issue became public early this year, some speculated that it might become China’s “Lehman moment.”
Since then, it has been evident that Beijing is approaching the issue differently than Washington did when investment banking behemoth Lehman Brothers declared bankruptcy at the commencement of the global financial crisis in 2008.
Evergrande defaulted on some of its international debts after announcing that it might not be able to satisfy all of its financial commitments.
It is currently said to be in debt restructuring talks with Chinese authorities, which might entail the selling of some of its founder’s personal assets.
“It’s obfuscated,” Silk Road Research’s Vinesh Motwani said. “But no one is shocked when we speak to our industrial connections in China.”
“The major difference between the two is that Evergrande was a train catastrophe that everyone saw coming,” said Mr Motwani, who was working as an analyst at Credit Suisse in the United States at the time Lehman Brothers went bankrupt.
“When the ‘three red lines’ regulation was introduced more than a year ago, it was evident that Evergrande was one of the biggest offenders, thus China’s reply was ‘long overdue.'”
The “three red lines” are a series of debt ceilings that significantly restrict the borrowing power of some property developers. For decades, the industry had been characterized by unregulated borrowing, which China’s central bank, the People’s Bank of China (PBOC), called “reckless.”
According to Rory Green, the Head of China and Asia Research at financial advice company TS Lombard, Evergrande’s issue is a “grey rhino” incident, a term used to denote a slow-moving visible threat rather than a sudden “black swan” occurrence.
“The Evergrande warning has been circulating about for a long time,” he added, adding that “none of the bondholders should be shocked that they’re defaulting.”
Experts expect Evergrande’s reorganization would take months, if not years, with few headline-grabbing disclosures as regulators strive to prevent the kinds of shocks that shook the global financial system when Lehman Brothers went bankrupt.
Mr. Green cites previous major Chinese corporate failures. He anticipates Evergrande’s reorganization to take a long time, citing the implosion of insurance and banking behemoth Anbang as an example: “Anbang began restructuring two years ago and is still in the process. Because Evergrande is so large, it might take years. However, the worst finance situation, in my judgment, has passed.”
“Evergrande’s division into independent units is the most likely scenario. The grey rhino will be split up, and regional banks will be entrusted with dealing with the various parts in order to maintain the sector’s and economy’s stability.”
While Evergrande’s failure to pay interest on offshore bonds may not have caused a financial collapse because they are largely owned by affluent foreign investors, some analysts are concerned about the impact on the Chinese property sector’s reputation.
“It obviously damages foreign investors’ trust in China’s offshore real estate bonds,” said Jackson Chan of Bondsupermart, a financial markets research platform.
It has also made borrowing money from overseas investors far more expensive for Chinese property developers.
What remains to be seen is how Beijing balances the risks of the country’s large real estate industry losing access to inexpensive foreign investment while maintaining its stringent property market restrictions.