Wall Street will learn to love Evergrande's crash
* Via [https://www.reuters.com/breakingviews/wall-street-will-learn-love-evergrandes-crash-2021-09-21/](https://www.reuters.com/breakingviews/wall-street-will-learn-love-evergrandes-crash-2021-09-21/?taid=6149d2a7a5c42200013c638f&utm_campaign=trueAnthem:+Trending+Content&utm_medium=trueAnthem&utm_source=twitter)
* Non-paywall link: [https://archive.is/L9dsp](https://archive.is/L9dsp)
* Main article quote:
>HONG KONG, Sept 21 (Reuters Breakingviews) - Foreign investors have finally heard the alarm bells ringing around China Evergrande **(3333.HK)**, an enormous developer with a $300 billion debt pile roughly equivalent to the annual economic output of Finland. On Monday, European and U.S. benchmark stock indexes sold off on fears of financial contagion, while credit default swaps, the costs of insuring against Chinese sovereign default, surged. It’s about time.
>An Evergrande bankruptcy and correction in the local real estate sector will be painful, and not only for commodity suppliers. If a full-bore housing crisis ensues, it could cause an unprecedented contraction in the world’s second-largest economy, with implications for every company that invests in or exports things to China.
>Short of that, the risk of financial contagion seems limited. Evergrande dollar bonds were downgraded to junk long ago; high-yield issues by Chinese developers are mostly traded by speculators. Evergrande’s biggest lenders are domestic banks like China Minsheng Banking **(600016.SS)** and Agricultural Bank of China **(601288.SS)**, **(1288.HK)**. Much of its recent credit was raised by paying suppliers commercial paper instead of cash. During the U.S. subprime mortgage crash in 2008, the difficulty in establishing who held how much junk prompted banks to stop lending. Yet a similar liquidity crisis is next to impossible in China, where the financial system is controlled by the state.
>Some foreign trading desks will take a hit. Fund manager Amundi said it still has $25 million of exposure to Evergrande. Investment bankers who sold the developer’s bonds to clients may have uncomfortable conversations with lawyers coming up. It’s possible too that overseas institutions have been taking on default risk without knowing it, given founder Hui Ka Yan and peers’ fondness for exotic and opaque funding channels like wealth management products.
>There may be some silver linings. The historical outperformance of property compared to every other Chinese asset class has overheated demand for mortgages and shadow loans. It has warped Chinese consumption and investment, cannibalising capital from the securities markets, mutual funds and insurance. That has played poorly to the strengths of overseas wealth managers trying to lure China’s retail investors. If this is really the beginning of the end of the real estate boom in the People’s Republic, Wall Street financiers watching Evergrande crash would be wiser to reach for the popcorn, not the tissues.