July 5, 2022

Finance & Economy

Let's Talk About Investment

China Evergrande’s potential collapse could have a ‘big impact on the economy’: Strategist

Ed Yardeni, Yardeni Research President and Chief Investment Strategist, talks the implications of China Evergrande’s potential collapse.

Video Transcript


Well, some analysts are warning of a potential Lehman-like moment in China with property giant Evergrande on the brink of collapse. The developer’s reportedly amassed $300 billion in debt. It’s warning investors it could default on that debt. And there’s concern about a collapse having ripple effects well beyond China.

Let’s bring in Ed Yardeni. He is Yardeni Research president and chief investment strategist. Ed, good to talk to you today. For those who haven’t necessarily been following the story out of China, particularly in the property markets, give us some context here on how significant a collapse of Evergrande would be and how big of a systemic risk that presents.

ED YARDENI: Well, I think it is a big deal, for sure. It’s $300 billion in all sorts of liabilities to people who put deposits down on apartments that have yet to be built or that are half-finished. And then, of course, there’s all kinds of suppliers to the company.

So it should have a big impact on the economy if, in fact, they do default, which seems extremely likely. And it could have not global implications so much as regional implications. There may be other countries that are exposed to that kind of default situation.

But there’s no way that Chinese authorities are going to let this unfold the way that Lehman did. Remember, in the US we had the option of bailing out Lehman. And there was some personality conflicts that led the government to just say, let them just go. And that was a disaster.

The Chinese Communist Party is not going to let this blow up. Undoubtedly, they’ll replace management. Maybe you won’t even see the management again for a while. But they’ll restructure. And they’ll throw money at it. And they’ll throw money at the economy.

So I would say that if the stock market’s going down on Evergrande, it’s going to turn out to be a buying opportunity. Because when they do come in and save the day, that’s when this issue becomes a non-event.

It may not have significant risks or at least systemic risk beyond China, but, I mean, is this really just about an Evergrande story? There’s been concerns about the debt piling up within the property space over in China. How concerned are you that this is going to domino into other real estate players over in China? And if that’s the case, do investors really– should investors really be playing these names at all?

ED YARDENI: Well, I’m not a big fan of investing in China. Especially over the past year, we’ve seen that the government, the Chinese Communist Party, which really runs the country, has intervened in the marketplace. They’ve definitely moved away from any sort of concept of free market capitalism to more and more state control.

I mean, they’ve always had state control, but they backed off on it in recent years. But now they’re going off full, gung-ho speed installing the state in running companies.

And so I think the property market is going to be state-run. They’re going to replace management with some political operatives that will figure out how to restructure this thing and keep it from creating an entire meltdown in the economy.

But you know, China’s got problems even without this. The one-child policy has come back to haunt them. And their population is getting rapidly geriatric, very old, very quickly. And that may also be creating a problem here, is that they may be overbuilding, creating too much real estate properties and too much other infrastructure relative to the population that they have, in terms of the age demographics.

Yeah. Ed, let me just push back a little bit for people who might be listening here and saying, you know, we’ve heard this before. There are some people, obviously pre-2007, 2008, who were talking about– Lehman’s going to be fine. Or even if it does fail, it’s not that big of a deal. And we learned more about how it kind of across the market had these ripple effects.

But specifically with China, even though it’s a large economy, talk to me about even if there were issues like a Lehman in that country, why its role as a global player here specifically when it comes to their connection with the financial markets might not be as impactful as what we saw here in the US.

ED YARDENI: I think it could definitely be impactful in the commodity markets. Commodity prices look like they may be peaking here. I mean, clearly, if this leads to a restructuring of the property market– and nevertheless, we’re going to see a slowdown in building of properties, so they can sort of finish whatever grants started and sell it. So they have some digesting to do here. And in that case, then demand for copper, demand for steel, demand for some of these commodities, which has been going vertical, will now go the other way. So I think commodities could have an impact.

But in terms of the credit markets, this is not the kind of credit derivative structure on a global basis that Lehman had created. And again, look, we just had this– we’re still in the pandemic. We have been in the midst of what I call the great virus crisis. And the great virus crisis looked at the start like it could be as bad as the great financial crisis.

But the central bankers, the government authorities learned a lot from that last calamity. And they moved really quickly. I don’t see any reason why the Chinese wouldn’t do a quick move here as well and spend lots of money to keep this thing from having a major effect on their economy. And if that’s the case, that’s not likely to have much in the way of an impact on the global economy other than to slow things down, which isn’t a bad thing.

I mean, so real quickly before we let you go, I mean, investors watching this, obviously, have been watching the fall there in a lot of Chinese equities. I mean, would you be a buyer at these levels?



I would not. I would not.

All right.

ED YARDENI: I think in addition to Evergrande there’s all sorts of other issues of corporate governance and the government intervention in the market. No.

I like a simple answer to wrap up in a long week. Ed Yardeni, appreciate you coming on here to chat. We’ll see how it all plays out and be in discussions, have you back on. Yardeni Research president and chief investment strategist. Thanks again. Have a great weekend.