Can a financial crisis halfway around the world put a hurt on the economy? The emerging Evergrande crisis could roil China, but the U.S. largely appears shielded from any major disruptions.
U.S. stocks DJIA, -1.78% SPX, -1.70% fell sharply on Monday on the possibility of an Evergrande collapse. The giant real estate developer in China is deep in debt and could be in dire straits if the Chinese government refuses to save the company.
As far back as the 1700s, seemingly local financial crises have often metastasized to infect the rest of the world. The bankruptcy of Lehman Brothers in 2008 contributed to a global financial crisis. Before that, in 1998, the Federal Reserve orchestrated an unprecedented rescue of the hedge fund Long-Term Capital Management to stave off a potential global meltdown.
Yet even if Evergrande fails, economists say the fallout is unlikely to spread far beyond China.
For one thing, the company’s estimated $100 billion-plus in debt is not widely held. What made the Lehman and Long-Term failures so potent was their deep pecuniary ties to so many financial institutions around the world.
“Is this another Lehman moment for the U.S.? I’d say no,” said Jay Byron, chief economist at Wells Fargo Corporate & Investment Bank.
The more plausible scenario is that an Evergrande collapse deflates the Chinese real estate market and slows the country’s economy, especially if consumer spending softens further.
“Right now, I think this is a bigger concern for China, rather than the U.S. economy,” said Rubeela Farooqi, chief U.S. economist of High Frequency Economics.
The biggest risk to the U.S. would likely be a decline in the $120 billion worth of exports to China each year.
Still, that’s just a small percentage of the $20 trillion American economy and most trading between the U.S. and China probably wouldn’t be affected, Bryson said. China is heavily dependent on U.S. grain supplies, for example, in good times or bad.
What’s more, the Chinese government has shown a steadfast determination to try to limit any damage to its economy, and has often resorted to stimulus measures to keep growth steady.
“The Chinese have tried to tighten things up before, and when it starts to actually affect the rate of growth and employment, they tend to ease off the brakes and I think that’s what’s going to happen this time as well,” former New York Federal Reserve President William Dudley said in an interview with Bloomberg on Monday.
Wall Street investors, meanwhile, aren’t just reacting negatively to the Evergrande crisis.
Washington is struggling to approve an increase in the debt ceiling to stave off a potential U.S. default. The Biden administration is trying to pass a large package of tax increases and regulations. The Federal Reserve is finalizing plans to start withdrawing stimulus for the economy. And the delta variant has slowed the U.S. economy.
The Evergrande threat is just adding to the pile of worries, economists say.
“Whatever the outcome, there is always a risk of volatility and of financial conditions tightening as a result of this,” Farooqi said.
Source: MarketWatch