Evergrande: China's Lehman Moment Or Just Fear, Uncertainty And Doubt? How To Protect A Small Account If The Worst Happens.

Night falls on Guangzhou. Photo by Irina Iriser via Pexels. 

Three Ways Of Looking At Evergrande 

In our previous post (The China Syndrome), we looked at a worst case scenario of the impending China Evergrande Group EGRNF default, and we showed a way investors in the U.S. could protect themselves if the contagion spread here. Here we'll consider a couple of other views of the situation in China and how it might affect us. Then, in response to a comment on our previous post, we'll show how investors with smaller accounts can protect themselves. 

China's Lehman Moment? 

That was a question raised by The Guardian recently. Two of the more bearish observers quoted in that article were Peking University finance professor Michael Pettis and Teneo senior vice president Gabriel Wildau: 

“It seems that we may have already started the financial distress process. As the risk of insolvency increases, the behaviour of sales agents, homebuyers, suppliers and other stakeholders changes in ways that further undermine revenues and raise expenses,” said Michael Pettis, a professor of finance at Peking University. “Once that process begins, conditions can quickly spiral downwards unless someone like the government steps in to guarantee payments.” [...]

“The nightmare scenario is a fire sale of Evergrande assets that transforms a healthy market correction into a rout,” said Gabriel Wildau, a China political risk specialist and a senior vice-president at the advisory firm Teneo.

Or Just FUD (Fear Uncertainty And Doubt)?

In a thread on Twitter, Mira Christanto argues that concerns about Evergrande fallout are overblown, because the Chinese government has ways of putting out these sorts of fires that were unavailable to their American counterparts in 2008. After detailing previous defaults of Chinese property companies, Christanto summarizes the likely endgame for Evergrande: 

An Accident Waiting To Happen? 

At Bloomberg, John Authers, who formerly penned the reliably soporific "Long View" column at the Financial Times, suggest that, while the Evergrande situation "gives good reason for anyone to take a few more precautions against risk than they otherwise would" Evergrande is more a catalyst of convenience for U.S. investors than anything else. Drawing on bearishness surveyed by the American Association of Independent Investors, Authers characterizes our market as an "accident waiting to happen". 

Limiting Your Downside Risk In Case It Is A Lehman Moment

In our previous post, we showed how an investor could protect a $500k portfolio against market risk; in the video below, we use the Portfolio Armor iPhone app to show how you can protect a $50k portfolio using the SPDR S&P 500 Trust SPY as a market proxy.