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Will Evergrande's Liquidity Woes Morph Into Lehman-Like Collapse?

The liquidity crisis engulfing Chinese property developer China Evergrande Group (OTC:EGRNY) has had a domino effect.

A sell-off that began in the property space in China spread to the broader market in the country and has pervaded into the rest of the global markets as well.

LPL Doesn’t See Lehman All Over Again: Fears of a contagion have triggered a systemic risk scenario, similar to what the now-defunct Lehman brothers went through about 13 years ago, said LPL Financial’s chief market strategist Ryan Detrick.

With more than $300 billion in liabilities and only $15 billion in cash on hand, Evergrande is the world’s most indebted real estate developer, the analyst noted. It appears that the company won’t be able to pay $84 billion of interest due along with potentially missing a principal payment on at least one of its loans, the analyst said, citing Bloomberg.

With the Chinese government showing no inclination to bailout the company, it has now turned its attention to banks and other creditors to help the impact of a default, Detrick said.

Last week, Evergrande suspended trading of its onshore corporate bonds, taking it one step closer to restructuring or default, the analyst said. 

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Despite the surrounding gloom around Evergrande, Detrick does not see the company as a Chinese version of Lehman.

Most of Evergrande’s debt is in global mutual funds, ETFs and some Chinese companies, and not banks or other important financial institutions, Detrick said.

This is in contrast to Lehman, which was held on nearly all other financial institutions’ books, so not nearly as many institutions will be impacted by this versus Lehman, he added.

Secondly, the odds of the Chinese communist government getting involved should there be a default are is high, Detrick said. Finally, Evergrande has tangible assets that can be sold off to settle financial obligations as opposed to Lehman, which didn’t have hard assets it could sell off, he said. 

“Short-term funding markets are acting just fine in China thus far; remember, it was the money markets in the U.S. that first started to show cracks in the system in early 2008, well before the wheels fell off,” Detrick said.

Navellier Calls Out China Recession: Evergrande’s contagion fears are not expected to spread to the U.S., but China is now dangerously close to slipping into a recession, Louis Navellier, chairman and founder of Nevallier & Associates, said in a note.

“China’s junk bond market started to falter a few weeks ago, and heavily leveraged Evergrande is just the latest ‘crack’ as Chinese financial companies start to deleverage,” the fund manager said.

Under no circumstances will Evergrande adversely impact the U.S. economy, the fund manager said.

“If anything, China’s debt woes will just make more money flow into the U.S. as an oasis in a chaotic world,” Navellier said.

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