-- As long as there is no deep correction in housing prices, Evergrande is just one of the companies who create some quarantinable chaos in the financial market.
-- China is fighting with surging housing prices, which seem to have grown with solid support.
-- There are certainly fundamental issues as we have all the time and everywhere.
When we have difficulty computing the interactive relationships between economy and financial market, one of the principles that we can use to simplify the puzzles is to focus on one side. In this case, it is actually what is happening in the real economy, while housing, with its bi-characteristic in real economy and financial market, makes more complicated the application of our simplification measurement.
At the first look, it did seem like something we are familiar with: Lehman brothers or someone related lent money to home buyers and some of them failed to pay back and chose to foreclose; Banks and others lent money to Evergrande and this home builder is failing to pay back.
Both of them caused chaos in the financial market. However, the difference is: in the Lehman Brothers case, what we saw in the real economy were more foreclosures with a nationwide housing price plummet; in the Evergrande case, what we are seeing so far are just unsold houses in small cities.
There is no evidence indicating that those houses in small cities, hard to sell as a result of China’s initiative tightening of credit, are becoming potential triggers of a nationwide correction of housing prices, especially considering we are talking about a country that is being in the process of urbanization and in an unprecedentedly loose monetary world.
The fundamental issue is where China's housing boom heads to and what it ends up with. The ideal solution is to be able to slow down the speed of price increase and what is more likely is a price crash. However, whatever it ends up with, it will not be another Lehman Brothers case and, particularly, it will not be now.
