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September 21, 2021 10:40 pm

China's Lehman Brothers Moment?

The New York Times: Angry home buyers are waiting on as many as 1.6 million apartments. Suppliers that sold cement, paint, rebar and copper pipes are owed more than $100 billion in payments. Employees who were strong-armed into lending are panicking now that the company cannot repay them on time. China's Evergrande Group, the embattled property developer whose towering debt has set off panic in global markets, is buckling under the weight of more than $300 billion in debt. The company's billionaire chairman told employees on Tuesday that they would "walk out of darkness as soon as possible." But the question for many is whether the company can stumble out of its current crisis on its own without being led by Beijing. And experts are making increasingly grim predictions about Evergrande's ability to hold on without a government bailout, and the consequences of a possible collapse. Matt Levine, writing at Bloomberg: Much of the writing about Evergrande has been about "is this China's Lehman moment?" The main lesson of Lehman was that the collapse of a big levered interconnected firm could cause serious economic damage, and since Lehman, financial regulators in the U.S. and Europe have done a lot of work on reducing leverage and interconnection and damage. But another lesson, one that I think about a lot around here, is that the way to reduce systemic risk and potential bailouts is for everyone to know how much risk they are taking, for risks to come with clear warnings and accurate labels, and for the risks to be taken by people who can handle them. If you must have big interconnected companies, it is good to know in advance whose claims are senior and safe and who is taking a big gamble in the hope of a high return. It is fine for a company to fund itself by selling speculative investments to retail gamblers, and it is fine for a company to fund itself by selling safe-as-houses investments to retail retirement savers, but either way it is important for people to know which one they're buying. Much post-Lehman financial regulation is about this sort of labeling: The way to prevent after-the-fact government bailouts is by making sure that risk is borne by people who bear it knowingly and can afford to. When companies fail, people will lose money, and you want to be able to say to whoever loses money, "well, you knew what you were getting into." Here that seems hard! Evergrande got its financing from absolutely everyone -- banks, investors, suppliers, customers, employees -- and it seems unlikely that they all knew what they were getting into. Its capital structure branches out everywhere; there are all sorts of sympathetic people who might lose money, and it is not obvious who should be rescued and who shouldn't be. Do you give the apartments to the people who put their hard-earned money into apartment deposits, or the ones who put their hard-earned money into wealth management products? Eventually either Evergrande will muddle through, or it will get a bailout, or it won't and people will lose money. But the long-term work of making sure this doesn't happen again is mostly about transparency, about allocating risks clearly in advance so you don't have to sort them out in hindsight.

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