Global investors have their eyes peeled on the Evergrande Group or the Evergrande Real Estate Group, China’s second-largest property developer by sales. Evergrande Group shares nosedived on Monday dropping to 11-year lows and many analysts and economists are concerned about a possible credit contagion. Credit problems with China’s real estate industry have affected global markets a great deal as European and U.S. stocks have slid during Asia’s overnight.
Evergrande Group’s Counterparty Risk and Liquidity Shocks Could Spark a Credit Contagion on a Global Level
Many people woke to the news of China’s Evergrande Group losing a significant amount of its market capitalization as the company’s shares dive-bombed to an 11-year low. While Evergrande losses can’t take down the economy alone, but it could cause a domino effect like the collapse of Lehman Brothers did during the 2007-2010 financial crisis. The domino effect is called a “credit contagion” and signs of this occurring are already happening.
Other mega Hong Kong and China-based real estate giants are feeling the heat of Evergrande Group’s losses and the possibility of the firm defaulting. Hong Kong’s Henderson Land Development Co. saw a significant selloff and Ping An Insurance Group Co. also saw shares tumble. The Hang Seng Tech Index plunged in value on Monday morning as the news roiled markets. Analysts and economists believe that the debt from Evergrande could move to other lenders and bond markets in the near future.
The problem with Evergrande and China's property bubble is that all the Keynesian 'solutions', liquidity injections and bailouts have already happened.
It is not an issue of liquidity but of solvency.
— Daniel Lacalle (@dlacalle_IA) September 20, 2021
Basically, a credit contagion happens when counterparty risk and liquidity shocks take
