Jeff Moon, fmr. assistant USTR for China affairs, & Ben Harburg, MSA Capital managing partner join ‘Squawk on the Street’ to explain how China may deal with a potential Evergrande collapse and how foreign investment will be impacted. For access to live and exclusive video from CNBC subscribe to CNBC PRO:
A liquidity crisis at a large Chinese property developer has shaken global markets, and strategists say it could send ripples across the global economy.
But they also say the issue will likely be contained by the Chinese government before it wreaks damage in the banking system, and it is not expected to lead to a broader global financial contagion.
The critical question for investors is how and when do leaders in Beijing handle the situation and whether they launch a restructuring of China Evergrande Group, as many market pros expect.
Investors have worried that Beijing is likely to let the company fail, wounding stockholders and domestic bondholders. Evergrande faces a debt payment on its offshore bonds on Thursday, after it said last week it was facing unprecedented difficulties.
“Everyone was expecting the government would have some kind of resolution, given that Evergrande is a systemically important company,” said Jimmy Chang, chief investment officer at Rockefeller Global Family Office. “It has $300 billion in outstanding debt. There is a contagion issue if China Evergrande is not resolved. I think it will end up having some deep-pocketed state-owned enterprises to take over.”
Market pros don’t think that Evergrande could lead to the next financial crisis, but it could lead to more volatility.
“The hard thing about particularly understanding China is that it is an opaque system and oftentimes you don’t have answers until you get answers,” said Rick Rieder, chief investment officer of global fixed income at BlackRock.
“The banking system tends to be controlled by the government,” Rieder added. “There is government intervention that presumably would come in. I think for a period of time, when you wrap this into everything else there, there’s near-term financing questions around some of the other property entities, and when that happens then it can create some volatility and some financial contagion. My sense is the government will act, and my sense is it will stabilize.”
Rieder said there could be some caution around Chinese property companies and multidisciplinary companies for a period of time.
There is concern the already slowing China economy will be affected further and that could flow into other economies.
Chang said the Chinese government needs to act quickly since Evergrande is beginning to affect sentiment, after being ignored by global markets.
“It could be a self-fulfilling prophecy. This liquidity issue — real estate is so important to the Chinese economy and the financial well-being of so many Chinese families. Homeownership is over 90%,” said Chang. “So many people buy apartments as an investment, so if this thing is not contained, it could become a real black swan.”
The fact that China’s economy is so large could affect the rest of the world, Chang added. “If China were to have a serious economic issue because of China Evergrande, the rest of the global economy would have contagion from it.”
The Dow Jones Industrial Average ended Monday’s trading session down more than 600 points after steep stock market declines in Europe and Hong Kong and other parts of Asia. The 10-year Treasury yield, which moves opposite price, slid as low as 1.297% as investors sought safety in bonds.
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