The thought of a Lehman Brothers-esque collapse in China sent US investors rushing for the exit Monday.
The Dow Jones Industrial Average (^DJI) fell 614 points, while the S&P 500 (^GSPC) fell 75 points and the Nasdaq Composite (^IXIC) plunged 330 points. It was the market’s worst one-day drop in months and shattered a long period of calm for equities. The S&P 500 hadn’t fallen more than 1% since mid-August.
Investors were shocked by the news that major Chinese real estate developer Evergrande, almost defaulting on a mountain of debt and fear Beijing will crash and burn the company.
Brian Levitt, global market strategist at Invesco, told Yahoo Finance Live that there is too much at stake for the Chinese economy for that to happen.
“We believe that the social pact between the government and its people here will lead to a result that will not lead to a Lehman Brothers-esque moment,” he said.
“Evergrande is probably too big to fail, and the impact that a default on these bonds would have on the Chinese banking system and suppliers could be quite significant,” Levitt said. “So we would expect the Chinese authorities to step in and restructure to bridge this moment without a major incident occurring.”
Evergrande is one of China’s largest lenders. It has a staggering $300 billion in debt, more than any other publicly traded real estate developer in the world, and has become the banner of an overheated Chinese real estate market.
China’s crackdown on debt and Evergrande’s woes also attracted the attention of the Biden administration.
During Monday’s White House briefing, press secretary Jen Pskai said: “This is a company based in China whose operations are predominantly concentrated in China. That said, we are always monitoring global markets, primarily from the Treasury Department, of course, including assessing any risks to the US economy and standing by to respond appropriately if necessary.”
Evergrande is an important part of China’s economic engine. With more than 120,000 full-time employees and countless suppliers, Levitt said there was too much at stake for China for the company to collapse.
“I just don’t think it will be” [Beijing’s] approach to let the company go under without any form of support for the creditors or the financial system,” he said.
Giles Coghlan, chief analyst at HYCM, told Yahoo Finance Live that he believes Evergrande will be rescued or at least fail “in a structured way,” but said the bigger problem for investors is China’s continued containment of capital markets. .
“If President Xi’s steps against Tencent (TCEHY), Alibaba (BABA) and Evergrande, is this President Xi trying to reverse a decade-long step back to Western-style capitalism?” asked Coghlan.
“I think that’s the external risk that investors will be concerned about,” he added. “I think this [Evergrande] crisis will come along. I think it will fade into the background and the markets will recover pretty quickly, but the broader question: is this a bigger move by President Xi?”
Alexis Christoforous is an anchor at Yahoo Finance. Follow her on Twitter @AlexisTVNews.