Markets Tumble As China Faces a Lehman Brothers Moment

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Chinese President Xi Jinping has unloaded more drama than is fit for an over-the-top Mexican soap opera on markets this year.

But while previous clampdowns have left investors reeling, Xi’s latest flex is making many outright terrified. On Monday, China’s second largest property company, hamstrung by regulatory crackdown, teetered on the edge of a Lehman Brothers-style collapse.

Xi seems ready to let it fall and the world’s markets with it.

One Crackdown Too Many

An ongoing series of industry crackdowns in China are meant to promote what the government calls “common prosperity” — though no one seems to know what on earth that means. The most publicized has been aimed at tech companies, which were hammered by a slew of new data and security regulations. A resulting sell-off wiped $1.5 trillion off Chinese stocks. The entertainment sector was hit with bizarre demands like wage caps for celebrities and a ban on “sissy” men from appearing on TV.

But no move has roiled markets quite like the real estate crackdown. China capped the amount of leverage property developers are allowed to access, crippling the ability of weaker companies to get funding. As a result Evergrande, China’s second largest and the world’s most indebted developer, is standing on the edge of bankruptcy, and threatening to pull down markets in a Lehman-style collapse:

  • Evergrande has $300 billion in obligations to creditors. It has $129 million in interest payments due this month alone, and Chinese regulators have already told creditors not to expect their money.
  • Evergrande’s shares fell 18.9% in Hong Kong Monday to a decade low. Elsewhere, sell-offs have already begun in earnest: the S&P 500 fell 2.7% for its worst day in a year, worries about construction slowdown sent iron ore below $100 a tonne for the first time in over a year.

Titanic Problem: China’s property sector accounts for a whopping 29% of GDP, and Evergrande’s demise would send shocks through the economy, potentially destabilizing the world’s post-pandemic recovery. “Evergrande is just the tip of the iceberg,” Louis Tse, managing director at Wealthy Securities, told the Financial Times, warning that Evergrande could trigger a series of developer defaults that would expose the banking sector.

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