Could Evergrande cause a financial crisis, similar to Lehman in 2008?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 362.7 million views in recent years.

In the answers below I focused on the following topics and issues:

• Could Evergrande cause a financial crisis, similar to Lehman in 2008?
• The stock market didn’t crash in 2021, yet the question was asked last year on Quora. What does this show?

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I read a financial article comparing the troubles of China Evergrande to when Lehman Brothers had a disorderly bankruptcy in 2008 and caused a worldwide credit crisis and recession. Is that comparison accurate? How much danger is there of trouble?

It is unlikely this will become a Lehman moment for the following reasons:

• Lehman wasn’t bailed out. If it really came down to it, the Chinese Government would bail out Evergrande, because they would be petrified of the social and political ramifications. The weakness of the Chinese system is they need stability to maintain order, whereas strong systems actually gain from disorder. as Nassim Taleb and others have stated. Regardless, the government won’t allow them to fail IF it is likely that doing so will have a huge financial impact on the system.
• One of the reasons for the crisis is that the Chinese Government is worried about the debt built in the system, and they are trying to deleverage in an orderly way, not increase the debt.
• The banks in much of the world are much better capitalized than before. Witness how Covid-19 didn’t affect the banking sector in any big way.
• The credit crisis happened in Western countries because the government couldn’t force banks to lend to each other once the crisis in confidence began. Most banks in China are state-owned, and the government has too much power. This is a bad thing of course, but it does mean that if the crisis did get unexpectedly bad, the same issue couldn’t happen – the government could make banks lend to each other to avoid a crisis crunch.

One day crisis will come to China, as it will to every other major economy, but I don’t see it coming due to Evergrande.

What is much more likely, long-term, is some kind of debt crisis at the local level, or in more unregulated spaces like shadow banking.

Shorter-term, issues like this are more likely to merely drag growth down a bit.

The official Chinese growth figures, which should always be taken with a pinch of salt as Paul Krugman and others have stated, will probably be 4%-5.8% in 2022.

If growth comes in at below 5%, that will be one of the weakest shows for thirty years.

People also forget that it is the Chinese Government’s stated aim to double the economy by 2035.

That sounds like a lot but it would represent an average growth rate of 4.7%, since the target was made in 2020, and comes in with a specific assumption – growth will slow down gradually until 2035.

Even if China achieves that target, the US might remain, just about, the biggest economy in the world by 2035, with growth rates fast converging before then.

The point is, things like “Zero covid”, Evergrande, and the crackdowns on big tech are more likely to make these downward growth trends worse.

In this context, it is entirely sensible that many forecasters have downgraded their assumptions for China’s GDP growth in 2022 and 2023, with this issue dragging down 30% of the economy (real estate and construction).

However, this trend is unlikely to bring in a formal crisis in the banking or economic system.

As a final point, I also don’t think they will have any impact on the Chinese, or international, stock markets.

They will neither be positive, nor negative, for stocks in the medium-term.

Is the stock market going to crash in mid-2021?

Above is how the S&P500 performed in 2021. There was no market crisis, but there were dips.

The market had a great 2021, as did many others, despite the two or three dips in the middle, which you can see on the picture.

Most of the gains were for the first eight months of the year.

The bottom line is this

1. Markets go up long-term, especially when you adjust for dividend reinvestment.
2. There are crashes but nobody knows when they will happen. Few see the next crash coming. From those that do, even fewer see the next one coming, so correctly predicting (and profiting) from events for decades is so difficult.
3. A stoped clock is right twice a day. Those who claim that markets will crash every year will eventually get it right, and boast about it for years. That doesn’t mean it is profitable to wait for markets to fall.
4. Even if the stock market did crash in 2021, it doesn’t make a difference to the long-term investor. Look at 2008, 2020 and every crash in history. Markets soon recover.
5. Inflation is running at 5%-7% when people are getting 0.1% in the bank. The sure risk of losing out to inflation is omnipresent. Inflation also compounds. Losing 3% for ten years is more than a 30% indirect loss to inflation.

As a result of the above, it is better to resist the urge to think about this question every time it comes up in 2022, 2023, 2024 and every single year thereafter.

Just look at Quora and replace your 2021 question with 2020, 2019 and every single year before that.

You can see people are always worried, needlessly, about this same question.

Just build a well-diversified portfolio, be long-term, and you will be fine.

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 694.5 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

Further Reading

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