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Will the Chinese Housing Market Crash Amid Evergrande's Crisis?

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Sep. 21 2021, Published 1:26 p.m. ET

Analysts say that the collapse of Chinese developer Evergrande could have a ripple effect and cause the Chinese housing market to crash.

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In an interview with CNBC’s “Street Signs Asia” on Sept. 19, Jenny Zeng with global asset management firm AllianceBernstein, warned that an Evergrande default could have a “domino effect” on other Chinese real estate companies.

“In the offshore dollar market, there is a considerable large portion of developers (who) are implied to be highly distressed,” Zeng told CNBC.

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Evergrande impacts China’s real estate sector.

The impact of Evergrande’s debt crisis already appears to be impacting the overall Chinese real estate sector. In August, Chinese home sales by value fell by almost 20 percent YoY, The Guardian reports.

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Evergrande, China’s largest property company, is in debt to the tune of $300 billion. The company owes $84 million in bond interest by Sept. 23. If the company defaults on its debt, the result could be a decrease in the rate of inflation that would impact the whole Chinese economy, Newsweek reports.

The Chinese government enacted measures to curb borrowing.

China’s real estate market has already taken a hit from new measures that the Chinese government enacted last year to rein in borrowing costs. Those measures include caps on debt and land purchases. The new measures limit mortgages and credits to developers and require developers to repay existing debt before borrowing more.

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Is Evergrande another Lehman Brothers?

Analysts are divided on whether the potential collapse of Evergrande is the Chinese version of the 2008 fall of Lehman Brothers due to the subprime mortgage crisis, which led to a global financial crisis.

“Talk of a Chinese 'Lehman moment'—a financial collapse and recession akin to the failure of Lehman Brothers in 2008—is premature. But the credit correction that Beijing is launching may be harder to manage than the Party’s central planners think,” wrote The Wall Street Journal editorial board in an opinion piece on Sept. 16.

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Evergrande debt crisis causes a plunge on Wall Street.

Evergrande’s debt crisis is the main factor that caused global stock markets to fall considerably in the past month. On Sept. 20, the U.S. stock market had its worst day of trading since May. The Dow Jones Industrial Average fell more than 500 points, while the S&P 500 fell as much as 2.9 percent before rebounding a bit.

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The only index to increase was the CBOE Volatility index or Vix. The Vix is referred to as a “fear gauge” because it measures expected volatility in the S&P. On Sept. 20, the Vix hit a high of 28.8.

Concerns about the health of the Chinese real estate sector also resulted in a sell-off that caused China’s Hang Seng Property Index, which tracks a dozen property developers, to fall to its lowest point since 2016, reports Financial Times.

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Will the Chinese government intervene in the Evergrande crisis?

To avoid a “Lehman moment,” the Chinese government is expected to intervene in the Evergrande debt crisis, Kirk West of Principal Global Investors told CNBC’s “Street Signs.”

“We do expect them to intervene at some point and broker some type of orderly restructure,” West told CNBC.

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