Is China about to have its own ‘Lehman Brothers’ moment?

Evergrande -- one of China’s largest property developers -- is sitting on a $300B debt bomb that could severely hamper the economy.


September 21, 2021

Just over 13 years ago, US investment bank Lehman Brothers declared bankruptcy, sending global markets into a tailspin.

Now, a similar problem is brewing in China.

One of the country’s largest real estate firms, Evergrande, is on the brink of collapse.

A sinking ship

According to The Guardian, the property developer is weighed down by $300B+ in debt as China’s housing market slows (in August, national home sales were down ~20% YoY).

The real estate sector is 25% of China’s economy and has benefited greatly from China’s debt-fueled boom in the past few decades.

Evergrande accounts for ~2% of China’s real estate

It runs 1.3k+ projects in 280 cities across the country.

The rapid growth has extended into health care, theme parks, and (sure, why not?) electric car manufacturing, per The Wall Street Journal.

Even with sales hitting $120B in 2020, the operation has become too sprawling. Evergrande is so strapped for cash, it’s even paying suppliers with apartments.

Is China’s Lehman Brothers moment coming?

By the time this email comes out, Evergrande will likely have defaulted on 2 bank payments. The developer still has 1.4m+ unfinished apartments worth $200B that may never be built.

Analysts are concerned that due to its size, an Evergrande failure will drag down the rest of China’s economy and, potentially, global markets too (yesterday, the S&P 500 had its worst day since May).

As head of a 1-party state, China’s president, Xi Jinping, will have more direct control in Evergrande’s fate as compared with the Lehman example.

The world is waiting to see what he’ll do.

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