Evergrande bubble popped in time: no Lehman moment

[onebyone]

Lehman moment avoided in 2021 Evergrande case? File photo from October 8, 2008, shows investors protesting outside Hong Kong's Legislative Council accusing locally operating banks of misleading them in investment products from failed US investment bank Lehman Brothers. Photo: AFP / Mike Clarke


Equity markets on September 22 and 23 turned in their strongest two-day performance since last May, as fears of contagion from China’s Evergrande real estate giant faded.

Far from a Lehman moment, the Evergrande crisis was a preemptive popping of a bubble – the sort of action that US authorities might have been wise to take in 2004 before the collapse of the US housing market nearly took down the global banking system.

Chinese authorities won’t bail out Evergrande, which with nearly 2 trillion yuan (US $430 billion) in liabilities is the biggest source of risky real estate credit in the world.


A 17% rise in Evergrande’s battered equity price in Hong Kong trading Thursday indicates that the company has a chance of survival in much-shrunken form – although without government help. The Chinese government will underwrite Evergrande’s existing obligations to home buyers, but nothing more.

The Evergrande crisis will accomplish a set of objectives, senior Chinese officials told Asia Times.
First, it will stop the growth of dangerous leverage in the property sector, an objective that Chinese regulators signaled in 2020 with “red lines” for developer leverage and curbs on lending to the property sector. “It’s dangerous to pop a bubble,” one official said, “but even more dangerous not to.”

Second, it will bring down home prices, in keeping with the government’s theme of “common prosperity” and more equitable distribution of rewards. Soaring home prices, particularly in coastal cities and Beijing, have put home ownership outside the reach of lower-income Chinese.

Third, it will suppress inflation by reducing speculative building and demand for iron, copper, cement and other raw materials.

Fourth, it will help drain the political swamp in Chinese local governments, whose finances have depended on property sales. The cozy relationship between local officials and property developers encourages corruption and inhibits the central government’s efforts to modernize the tax system. “The real estate bubble arose through corruption,” one official commented.

Fifth – and most important – it will shift capital allocation toward high-productivity industries like manufacturing and away from construction, an inherently low-productivity occupation.