China has it's "Lehman moment" with Evergrande liquidation crisis.
The Shanghai Stock Exchange temporarily halted trading in Evergrande bonds after they crashed following a liquidation frenzy.
Evergrande, China’s “Lehman Brothers”, is a large multi national real estate developer that is severely overleveraged. The company has a market cap of around $300bn. Reports of a bank-run on the company began when debtors sought redemptions for the money they loaned to Evergrande after the companies bonds suffered a ratings decrease and become ineligible to serve as collateral on the repo market.
This stunning development occurred after the bonds fell almost 25% on Monday afternoon, with ratings agencies stating that “default is likely.” This massive company default is likely to have ripple effects throughout the banking system of China and the global economy. The shares of the company have lost almost 74% this year since the Chinese government began to crackdown on the property market. The countdown to insolvency has begun even though some creditors have agreed to extend credit lines to Evergrande for a few months.
Unfortunately, our global economy is so connected and there are a large percentage of retail investors with at least some of their portfolio in China. This scenario may creat a contagion spread of default risk to US companies. Everyone remembers when AIG and Lehman began to present a clear credit risk in 2007, at first it seemed contained, but then investors discovered how interconnected these banks were to the world economy when the markets dropped almost 50%.
This also comes on the heels of Chinese media threats that warships will “show up on the doorstep of the United States” and that the Chinese Navy will conduct exercises near American Naval Bases. China is clearly escalating conflict on the United States and any potential economic problems for China may provoke them to stir up conflict with the US in order to distract from problems in their own country. This potentially volatile situation needs to be watched very closely. Since this story began to unfold on Friday, the S&P 500 has had four consecutive red days with more likely to follow.