That's the $ 300 billion question.
Is Chinese real estate giant Evergrande the Chinese Lehman Brother?
The promoter reassured some of his investors, Wednesday, September 22, by announcing that he could repay a first installment of 38 billion dollars which was due the next day.
But that's only a tiny tenth of its debt - which stands at around $ 300 billion.
Most importantly, Evergrande hasn't said anything about another $ 83.5 billion debt, which also expires on Thursday.
A "seductive" parallel with Lehman Brothers
If he does not manage to repay this debt on time, the real estate developer will have 30 days to negotiate a compromise with his creditors.
Otherwise, the group will be officially in default of payment.
A prospect that gives the financial markets a cold sweat.
The fall of the Evergrande empire "would be China's Lehman Brother moment," said Uday Kotak, one of India's richest bankers, on Twitter.
A comparison with the bankruptcy of the American bank at the origin of the 2008 crisis which comes up more and more often in the media.
Evergrande seems like China's Lehman moment.
Reminds us of IL&FS.
Indian Government acted swiftly.
Provided calm to financial markets.
The Government appointed board estimates 61% recovery at IL&FS.
Evergrande bonds in China trading ~ 25 cents to a $.
- Uday Kotak (@udaykotak) September 21, 2021
The parallel is "attractive because there are obvious similarities in the story of these two collapses", recognizes Alexandre Baradez, financial analyst at IG France, contacted by France 24.
In both cases, they are heavyweights in their respective fields.
Lehman Brother was the fourth largest investment bank in the United States before it disappeared, while Evergrande is the second largest Chinese real estate developer.
Read also on France 24: Evergrande: the real estate conglomerate symbol of the Chinese "too big to fail"
"These are also two institutions which have marked the history of the economic development of their country", specifies Alexandre Baradez.
Lehman Brother played a vital role in the formation of the real estate bubble before 2008, while Evergrande has accompanied the forced urbanization of Chinese society since the early 2000s.
These are above all "two players who misjudged the risks", summarizes Mary-Françoise Renard, specialist in the Chinese economy at Clermont-Auvergne University, contacted by France 24. The American bank has granted far too many risky real estate loans (the famous subprimes), and the Chinese giant has become more indebted than reason by seeking to diversify into sectors as different as football, leisure parks or even mutuals.
In 2019, he launched a brand of electric cars without having any experience in the field of automobile construction.
And Evergrande has also just called on Houlihan Lokey, the American restructuring specialist who advised Lehman Brothers in 2008 ...
Less risk of global contagion
So many similarities that only tell part of the story.
The differences between the two situations are just as notable and lead most analysts to say that "the parallel between the two situations is probably exaggerated", argues Jacob Gunter, specialist in Chinese industrial policy at the Mercator Institute for China Studies (Merics) , contacted by France 24.
First, Evergrande is a particularly lame duck in the Chinese real estate landscape.
"The CEO and founder of the group, Xu Jiayin, has a very pronounced taste for risk, even by Chinese standards," notes Jacob Gunter.
Lehman Brother's practices, on the other hand, were not much different from those of other investment banks during the time of the subprime crisis.
Then, "if the idea is to suggest that a possible bankruptcy of Evergrande will have the same systemic effect on the entire world financial system as the fall of Lehman Brothers, that seems unlikely to me," said Xin Sun, specialist. of Chinese economic policy at King's College London, contacted by France 24.
First, because a large part of Evergrande's debt is held by Chinese players - whether banks, small holders or buyers of apartments under construction.
"The exposure of foreign investors to the group is much less than in the case of Lehman Brothers", specifies the economist of King's College.
The risk of seeing international banks financially taken by the throat because Evergrande can no longer reimburse anything is therefore low.
Furthermore, even the foreign banks that have loaned money to Evergrande are not going to be taken by surprise. "There won't be the astonishing effect like in 2008, when Lehman Brother went bankrupt literally overnight. This time around, we've been talking about Evergrande's difficulties for months, which has left time for investors to build fallback solutions in the event of liquidation of the Chinese group, "says Alexandre Baradez, IG France.
This does not mean that the consequences of a bankruptcy of the Chinese giant will not be significant ... but "they will be especially felt on the domestic market", assures Xin Sun.
A dismantling of Evergrande risks bringing down prices in the real estate market, which could push other developers, most of whom are also in debt, to go out of business.
"Small banks which have lent too much to real estate groups, as well as suppliers will also have financial problems," predicts Mary-François Renard.
Beijing's choices
All the Chinese who had paid down payments for housing Evergrande was to build also find themselves wondering what will happen to their investment.
Clearly, "the systemic risk is important, and if the Chinese financial system were as closely linked to international financial markets as that of the United States, the danger of a global contagion would be much greater", summarizes Jacob Gunter, of the Merics .
Finally, the Chinese authorities are unlikely to handle the Evergrande case as Washington did with Lehman Brothers.
The United States had sacrificed investment banking to set an example and then spent lavishly to prevent the entire banking system from collapsing.
Beijing is unlikely to do the same.
The regime "has just introduced rules this year to encourage companies to get into less debt and come to the aid of an entire sector which is struggling to repay would send a contradictory signal, to say the least," said Xin Sun.
"He is caught between these reforms and the need to help Evergrande," confirms Mary-Françoise Renard.
What then?
"The goal will be to cushion the fall to make the crisis manageable," said Jacob Gunter.
Beijing has, to do this, "a toolbox specific to authoritarian regimes," adds the Meric specialist.
He can force public companies and "put pressure on private companies to buy assets from Evergrande to better distribute the risk," concludes Jacob Gunter.
But it is obvious that there are going to be financial victims.
And it will not be the small carriers and those who had paid for future housing.
“The regime's number one priority is to avoid anything that could lead to social unrest,” says Alexandre Baradez.
And the images - rare for China - of protesters outside the Evergrande headquarters on September 15 demanding reimbursement underscore how explosive the situation can be.
In the opinion of all the specialists interviewed, the first to pay the price will be foreign investors.
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