We recently had a few queries in relation to the evolving situation with Evergrande, so thought it would be good to provide a brief update here. If you are wanting to discuss in more detail, then please get in touch with me at pete@pekada.com.au.

We continue to monitor the impact of the Evergrande situation. After showing signs of stabilising, the missed repayment earlier this week by Evergrande has heightened concerns once again. Our expectation is that any debt defaults by Evergrande will not create systematic financial dysfunction in the same way that Lehman Brothers’ collapse did in the GFC. Although the cause of the financial difficulties have similarities, there are key differences in the prevailing environment and how the relevant financial institutions are managed and supervised. Unlike the situation prevailing in the GFC, funding costs are exceptionally low, and liquidity & loan availability remains healthy across the global financial system. In addition, there has been no widespread collapse of the price of property assets underpinning the security of loans made by financial institutions.

Being a Chinese based property developer, the contagion risks of any default by Evergrande is expected to be managed by Chinese authorities. With many forms of direct control and financial support at their disposal, Chinese authorities are well placed to manage any single bankruptcy by providing financial assistance and credit provision on a targeted basis. As such, whilst there are risks associated with the recent event surrounding Evergrande, we don’t believe it will be a catalyst for wider dysfunction. Chinese equity values have already significantly adjusted downwards in response to this and other risks and we believe there are now adequately priced into the market.