One of the world's most well-known short-sellers, Jim Chanos, told FT the Evergrande crisis is just a symptom of the property-driven growth model coming to an end and could be "far worse" than a "Lehman-type" blowup for China.
"There's lots of Evergrandes out there in China — Evergrande just happens to be one of the biggest," Chanos said.
"But all the developers look like this. The whole Chinese property market is on stilts."
Chanos could be right. After all, on Monday, Chinese realtor Sinic Holdings crashed 87% in Hong Kong on fears of a slowdown in the Chinese real estate sector.
Evergrande is the world's most indebted developer, with at least $300 billion in debt outstanding. In recent months, a liquidation panic of the company's bonds sent its 2023 bonds from 90 cents on the dollar in June to 26 cents present day. In recent weeks, the collapse has spooked markets, including global equities, credit, FX, and commodities.
Fears of Evergrande's unraveling seemed imminent earlier this week after two anxiety-filled days during which China was on holiday and traders hammered Hong Kong trader property stocks in the anticipation the company would default on its yuan bond. However, Evergrande's onshore unit unveiled vaguely worded plans to pay the interest due Thursday while leaving the fate of an $83.5 million offshore bond coupon payment in limbo.
Unlike Lehman, which caused an international implosion of the financial system, most of Evergrande's $300 billion in liabilities are held with creditors and businesses in mainland China. So worldwide contagion might not happen this time around but could certainly inflict severe pain for the world's second-largest economy.
Chanos said the consequences of default by Evergrande could unleash a credit crisis in the country:
"In many ways, you don't have to worry that it's a Lehman-type situation, but in many others, it's far worse because it's symptomatic of the whole economic model and the debt that's behind the economic model."
"If you try to deflate this bubble, it is fraught with risks. I don't think they're contagion risks."
Evergrande could be transformed into a zombie company where it defaults on its interest payments but is given extended time to repay or restructured. One would assume Communist Party won't allow the company to implode ahead of a closed-door Communist Party's Central Committee in November.
In the meantime, the communists will have to figure out "new growth drivers or downshift somewhat semi-permanently into a lower level of growth," he said.
"Has the Chinese Communist party grappled with the implications of that? That remains to be seen," he added.
Lower and slower growth is something President Xi Jinping and his ruling party cannot have and perhaps is why People's Bank of China has come to the rescue this week in the biggest one-day injection since February.
Chanos' New York-based hedge fund Kynikos Associates has doubled its exposure to China in its global short fund to more than 10% this year, with short positions in HSBC and Standard Chartered, "due to their heavy loan exposure to Greater China."
... and let's not forget, no matter how the Evergrande drama plays out, China's housing market is in trouble.