Friday, January 21

Wall Street’s message about Evergrande


Wall Street analysts are putting their faith in the Chinese Communist Party.

After a heartbreaking Monday in which risk assets plummeted globally for fear of a collapse at China Evergrande Group, some of the world’s largest banks and money managers were quick to assure investors that this is not the Lehman moment.

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The message from firms like Citigroup Inc., Fidelity International Ltd. and AllianceBernstein Holding LP: Evergrande may indeed default, but the Chinese authorities will take steps to prevent the company’s crisis from destabilizing the financial system and economy.

Gains in S&P 500 index futures on Tuesday suggest investor distress has subsided, at least for now.

Here’s a sample of what strategists and money managers say about the possibility of contagion:

Ajay Rajadhyaksha, Barclays

So is this China’s Lehman moment? Not even close, in our opinion.

Yes, Evergrande is a great real estate company. And yes, there could (probably be) spill-over effects on China’s real estate sector, with economic implications. And yes, it comes at a time when China’s growth has already started to disappoint. But a true ‘Lehman moment’ is a crisis of a very different magnitude. It would be necessary to see a strike by lenders across much of the financial system, a sharp rise in credit distress outside of the real estate sector, and a reluctance to pit banks against each other in the interbank financing market. And with all that, we would also need to see massive political mistakes on the part of the Chinese authorities. In our view, the conditions are simply not in place for not even a major default to be China’s Lehman moment.

Judy Zhang, Citigroup

We don’t see the Evergrande crisis as China’s Lehman moment as policymakers will likely hold the bottom line of preventing systematic risk to buy time to resolve debt risk and drive marginal easing for the overall credit environment.

We believe that regulators can buy time to digest Evergrande’s NPL problem (for example, guiding banks not to withdraw credit and extend the interest payment term).

Kenneth Akintewe, Aberdeen Standard Invest Asia

Our base case is that there will be a relatively orderly restructuring, it is not in the interest of policy makers, the economy or the market to go into an uncontrollable destabilized spill and this affects other parts of the economy.

In the short term there will be uncertainty and volatility, but outside of Evergrande, policy makers will be able to engineer some kind of recovery from this.

Bhanu Baweja, UBS

I don’t think this is a Lehman moment. I think when you try to reduce moral hazard after four major credit cycles, it will be difficult. The biggest risk here is not what happens to suppliers or what happens to the financial system in the short term, I don’t think that’s a problem. I think China has done reasonably well. Default levels are quite low in the overall economy and capital adequacy for banks, particularly large banks, is quite high.

I think the bigger question is what does this do to the collateral for the whole credit boom, which is property prices, and therefore to the confidence in the property itself.

Catherine Yeung, Fidelity International

If we look at the last three years, we have seen restructurings that the government or regulators have been involved in, be it in Huarong, China Fortune Land, and other unique credit events. So they are confident in terms of this potential restructuring.

The likely scenario is that they will avoid bankruptcy when it comes to Evergrande. [and] seek restructuring with strategic investors or bridge investors. The priority from a national perspective and a sentiment perspective is the completion of the supply chain forecasting and cash settlements.

Vishwanath Tirupattur, Morgan Stanley

Expectations of widespread contagion may be exaggerated. Clearly, the impact on growth is there. But I think the key point here is that I still believe that this is not a moment like the one we had in 2008. There has certainly been a subtle turnaround from policy makers in China. A lot of that we think is already reflected in the price.

Marko Kolanovic, JPMorgan Chase

[The market sell-off] It is mainly driven by technical sales flows (CTA and option hedging) in a low liquidity environment and the overreaction of discretionary traders to perceived risks. Our fundamental thesis remains unchanged and we see the selloff as an opportunity to buy the dip.

The risks are well marked and valued, with multiples of shares at post-pandemic lows for many reopening / recovery exposures. We look to cyclicals to regain leadership as delta flexes.

Shujin Chen, Jefferies

Against the market’s view, we see regulators keeping a close eye on Evergrande and believe it could soon come up with a plan or significant progress to reduce the impact.

We expect a plan to solve the problems or help make significant progress by the end of the year (also possible within 1 to 2 months), as China will focus on driving 1Q22 economic growth starting in 4Q21.

Larry Hu, Macquarie

A major concern is contagion risk for other high-leverage developers, as banks, providers and home buyers would become more cautious in light of the Evergrande saga. As a result, a self-fulfilling liquidity crisis could occur to other highly leveraged developers. That said, the government has the will and the ability to intervene if the market panics.

It could break the negative feedback loop by easing liquidity, as it did during the interbank credit crisis in 2013. Also, given that real estate policy is unprecedented right now, policy makers have plenty of room to relax if they wish. They seem willing to wait a bit longer to reduce moral hazard in the future, but could intervene at any time for the sake of financial and social stability.

John Lin, AllianceBernstein

There is very little chance that default will turn into a systematic crisis. First, Chinese regulators are the ones that triggered Evergrande’s most recent crash. Regulators have prepared for it and will be able to manage it.

Because there is a low probability of a systematic crisis, many of the Chinese developers, particularly the higher quality companies with a strong balance sheet, capable management and a good product reputation, will survive this round of correction. In the market panic for the past two weeks, their valuations have already been overshot downward. In our opinion, these select quality developers present attractive payback opportunities for long-term minded investors.

Tommy Wu, Oxford Economics

Concerns about the growing risk of default from Evergrande, the real estate developer, have hit financial markets for the past week. While we believe the government does not want to be seen as a bailout plan, we expect it to step in to carry out a managed restructuring of the company’s debt to avoid messy debt recovery efforts, reduce systemic risk, and contain debt. economic disruption.

© 2021 Bloomberg


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