Evergrande - Too Big to Fail?

Do Evergrande’s financial problems represent a risk to China’s financial system?

Teresa Kong: We believe Evergrande’s financial problems are highly unlikely to create a risk to China’s financial system. The company does have a large debt burden, but it is insignificant given the scale of China’s financial system. It's worth noting that, in recent years, two companies with similar magnitude debt burdens, Anbang and HNA, were successfully restructured without creating systemic damage. As in the past, we expect the government to take an active role in managing the restructuring of Evergrande to mitigate the risks, by ensuring that its current liquidity problem does not become an insolvency problem and a bigger crisis of confidence in the Chinese financial system.

Are Evergrande’s problems a reflection of systematic weakness in China’s residential property market?

Andy Rothman:China’s housing market is generally sound and has not been generating the kind of financial system risks that developed in the U.S. during the decade prior to the Global Financial Crisis, in part because China’s regulators have learned from our mistakes. Chinese banks have not been permitted to make irresponsible mortgage loans, and homebuyers are required to put down a lot of cash. There is very little mortgage securitization and most banks hold mortgages through maturity, so they have a clear incentive to avoid lending to risky borrowers.

Recently, however, Chinese regulators have become concerned about debt levels among developers, and put in place new regulations to manage that potential risk. Those regulations have led to slower growth in new home sales, which has stressed some developers, including Evergrande.