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Opinion

Macaskill on markets: Evergrande and the limits to China hedging

A consensus that Evergrande’s failure will be more like the LTCM unwind than the Lehman bankruptcy could underplay ongoing challenges in hedging Chinese exposure.

Evergrande tightrope

The consensus that Evergrande’s default will not create a Lehman-style systemic disaster is now well established.

Evergrande’s debts of just over $300 billion are less than half the $619 billion that Lehman owed when it filed for bankruptcy in September 2008, and the Chinese property firm is not an important trading counterpart for systemically important financial institutions.

That should give Chinese authorities time to undertake the laborious task of winding down Evergrande.

A steady drip of liquidity from the People’s Bank of China in the approach to a national holiday at the beginning of October indicated that the central bank was determined to hold down interbank rates and calm fears of contagion to the banking system.

China is pushing state-backed firms to buy Evergrande assets and encouraging banks to support the housing market, which also eased concerns.

A belief that Chinese policymakers will do whatever it takes to prevent a disorderly unwind of Evergrande exposure has led many to feel that a better comparison would be with the failure of US hedge fund LTCM in 1998.

LTCM’s bailout was handled smoothly, but may have given false confidence to market participants about the ability of US supervisors to handle crises.

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