Housing Market Meets Policy Headwind: Recent Lessons from Evergrande

The story of China’s Evergrande Group, one of the country’s largest and highly-leveraged developers, continues to develop by the day. As of early October, we see a low probability of systematic risk in the global financial system due to Evergrande’s financial troubles.  The company’s debt problems are likely to be carefully managed by Chinese authorities and have a limited effect on the Chinese financial system and the real estate market.  The spillover effect has been limited so far.  According to our analysis of the Chinese corporate bond market, there is no evidence of broad-based financial stress in China real estate and other industries.  With that said, we expect capital market volatility to increase in the near term.