Evergrande may not become China’s ‘Lehman Brothers’, argue Citi and Barclays strategists

September 21, 2021, 5:46 AM UTC

China Evergrande Group’s debt crisis is unlikely to become China’s “Lehman moment,” according to strategists at Citigroup Inc., Barclays Plc and UBS Group AG.

Barclays argues the market environment isn’t similar to what happened during the collapse of Lehman Brothers, UBS says the default levels are pretty low versus the size of China’s economy and Citi expects the policy makers to step in.

“The conditions are simply not in place for even a large default to be China’s Lehman moment,” Barclays macro strategists including New York-based Ajay Rajadhyaksha wrote in a note on Monday. One would need to see a sharp increase in credit distress away from the real-estate sector, banks unwilling to face each other and massive policy mistakes for that to happen, they wrote.

Growing investor angst about Evergrande and a crackdown on China’s real-estate sector have caused a chain reaction across global risk assets this week, even ensnaring stocks with less tangible links to China. S&P Global Ratings warned on Monday that the distressed developer is likely to default if doesn’t get support from Chinese government.

“Policy makers will likely uphold the bottom line of preventing systematic risk to buy time for resolving the debt risk, and push forward marginal easing for the overall credit environment,” Citi analysts including Judy Zhang wrote in a note. Still, some banks may become victims, they noted.

Citi’s analysis of banks’ loan exposure to high-risk developers suggest credit risk is the highest for China Minsheng Banking Corp., Ping An Bank Co. and China Everbright Bank Co.

Meanwhile, Bank of Nanjing Co., Chongqing Rural Commercial Bank Co., Postal Savings Bank of China Co. are less vulnerable and “we would see any dip as an enhanced opportunity to buy quality names,” the analysts wrote.

Jefferies Financial Group Inc. also sees “little chance of systemic risk” from Evergrande and advises investors to buy bank stocks on dips. It added Postal Savings Bank’s mainland shares to her top picks, citing the lender’s profit outlook and lower exposure to property sector. Jefferies other buy-rated stocks include  China Construction Bank Corp. and Bank of Ningbo Co., analyst Shujin Chen wrote in a note. 

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