As concerns about Chinese property giant Evergrande defaulting on its debt continue, one expert says that Chinese authorities are unlikely to let the company fail.
"You would potentially have a systematic threat to China’s financial system, so that’s kind of a bit of a no go, just letting the company default," Brendan Ahern, CIO of KraneShares, which is a provider of China-focused ETFs, told Yahoo Finance Live (video above).
Ahern added that letting Evergrand fail would "have a significant effect not only on say, 120 Chinese banks, another 129 non-financial institutions, suppliers to Evergrande."
A government takeover also isn't plausible in this kind of situation since a bailout "goes against what policymakers in China — they don't want to encourage bad corporate behavior."
Evergrande currently has over $305 billion in liabilities, and some worry about the potential risks to the Chinese financial system and global contagion were the company to fold. According to Bloomberg, Evergrande has an estimated $669 million in coupon payments coming due through the end of the year.
Ahern said that Chinese policymakers would likely either facilitate or encourage debt restructuring, and “restructuring would mean bondholders will take a significant haircut."
Ahern added that he's expecting the Chinese government to dip into this situation soon to resolve the issue because “the clock is ticking... they’ve gotta get this restructuring in place, make sure that Evergrande does not” default.
Current equity holders of Evergrande, which is listed on the Hong Kong Stock Exchange (3333.HK), should also brace for pain, Ahern noted, but that shouldn't be a surprise since the stock has been much like a "train wreck in slow motion" in 2021.
Evergrande is a 'cat with nine lives'
China's economy is in the midst of a shake-up as President Xi Jinping recently announced regulatory overhaul in various sectors — from tech to education to property,
The Evergrande situation "is Xi Jinping telling the populace... [that] Evergrande is not too big too fail," Brian McCarthy, chief strategist for Macrolens, which is a China-focused macroeconomic strategy group, told Yahoo Finance Live in a separate interview.
The process of fixing Evergrande's problems is likely to be "extraordinarily messy, and that’s the best-case scenario," McCarthy added. Nevertheless, he didn't see a huge risk of spill over effects if Evergrande does end up defaulting.
"I don’t see Lehman-like contagion internationally or perhaps even domestically because the Chinese government does control those banks and they will not stop lending to each other," McCarthy said.
In any case, Evergrande's problems were well-known to many industry experts prior to the current situation.
“Historically, Evergrande’s been like a cat with nine lives — they've run into solvency issues in the past but this time it's a little different in a post-COVID world,” Ahren said.
Aarthi is a reporter for Yahoo Finance. She can be reached at email@example.com. Follow her on Twitter @aarthiswami.