Will Evergrande Take Down China and the World Markets?

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For those who haven’t heard, global markets slumped yesterday as a Chinese real estate developer, Evergrande, was reported to be approaching bankruptcy. For many, this news brings to mind the great financial crisis of 2008. Back then, a collapsing real estate sector almost took the U.S. and global banking system down, starting with the Lehman Brothers investment bank. Now, the fear is that Evergrande could kick off China’s “Lehman moment.” In other words, many are starting to worry that we could be facing another global financial crisis.

Is this news worth paying attention to? Certainly. It’s scary stuff, if true. Is it worth worrying about? No, not yet. The fact is that there are significant differences between both the situation then and the situation now, as well as between the U.S. position in global financial markets and the Chinese position. When you add those details up, the situation does not look nearly as scary.

Another 2008?

Let’s start with Evergrande itself. Despite the worry, so far this looks like a corporate bankruptcy and not something worse. It’s a big one, to be sure, but one that can be handled within the system. Bondholders will lose money, other companies will be affected, and life will move on. So far, that situation is what we see and not something bigger.

Second, even if this does turn into something bigger, something that affects the Chinese economy and markets as a whole, the Chinese government has more money—and more legal powers—to contain the damage than the U.S. and western governments did back in 2008. The Chinese government can and will try to contain the damage before it starts to threaten the economy as a whole. The U.S. could do it in 2008, and the Chinese can do it now. They have, in fact, contained similar crises before.

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