'Lehman moment' fears are wide of the mark in China Evergrande fallout

'Lehman moment' fears are wide of the mark in China Evergrande fallout

Property developer China Evergrande Group’s debt problems have rattled fixed income and equity markets in Asia and beyond. But comparisons likening this to a ‘Lehman Brothers moment’ for China appear overstated and misdirected.

Reports on the financial strains at the property developer China Evergrande Group have been unnerving global markets, drawing comparisons to a level of systemic risk akin to a ‘Lehman Brothers moment’. I think this tends to overstate what are better understood as the isolated challenges of an overstretched firm. What we are seeing with Evergrande is in part the direct outcome of a proactive policy tightening and more stringent regulation of the property development sector that has taken shape in China over the course of the past year and longer.

The convergence of monetary, fiscal, and regulatory tightening that we’ve seen in China in recent months has come as policymakers seek to reinforce a strategy that places the paramount focus on ensuring more sustainable development. In practical terms, this means a shift away from targeting high levels of nominal GDP expansion and towards a sustainable growth agenda that looks to consider societal and systemic risks. Naturally, these conditions have created a challenging environment for highly leveraged firms as well as those in sectors that find themselves in the eye of the regulatory storm. Policymakers are particularly focused on avoiding rampant speculation in the property market, which has also been subject to a number of sector-specific measures to stabilise price inflation and curtail excessive leverage. 

A lot of what we are seeing here represents an aggregate strategy of avoiding longer term economic and societal risks, and part of what has informed this latest iteration of China’s economic growth strategy has been studying where issues have arisen elsewhere in the world. 

It is fair to say that this is a delicate balance, one that calls for enforcing discipline on the market but with an eye on localised systemic risks that can emerge as a result. For example, we have previously seen smaller property developers go bust, and a number of private and state-owned firms defaulted in the onshore market last year. But intervention and financial support are also quick to emerge for firms that have greater systemic significance, such as we saw earlier this year with China Huarong Asset Management. 

The vast majority of instances where individual events create wider contagion tend to be in circumstances where excess leverage has been allowed to build up broadly within certain parts of the economy, normally in the blind spot of policy makers and capital market participants. Given the progressive focus on areas such as shadow banking, leverage in the property sector, and lending through payment apps, it would be hard to argue that there is a broader ‘reset’ to come. Of course, there can always be policy missteps, but it feels like commentary describing the events around Evergrande as China's ‘Lehman Brothers moment’ is wide of the mark.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.

© 2021 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

Share:
 
 

Want more insights like this?

Get our free, monthly e-newsletter bringing you valuable insights, opinion and education.

Subscribe