Faculty of law blogs / UNIVERSITY OF OXFORD

Is It the Next Lehman Brothers Moment? The Evergrande Debt Crisis and Regulatory Precaution


Lerong Lu
Senior Lecturer in Law at King's College London
Anat Keller
Senior Lecturer in Financial Law at King’s College London


Time to read

3 Minutes

History repeats itself.

The financial industry has experienced constant crises since its early days, such as the Dutch Tulip Mania in the 1630s and the British South Sea Bubble in 1720. The Global Financial Crisis of 2007–08 is still fresh in our memory, as it had a devastating impact on world economies and led to an overhaul of regulatory frameworks in many jurisdictions, including the US, UK, EU, Singapore, and China.

More recently, a dark cloud has loomed over the global banking industry and financial markets, as evidenced by the liquidity problems faced by Credit Suisse in Europe and Silicon Valley Bank in the US in March 2023. Additionally, in November 2022, FTX, the third-largest cryptocurrency exchange in the world, experienced a sudden collapse, resulting in significant losses for global investors in this emerging asset class.

However, the current wave of global financial turmoil may have occurred much earlier than most people think. In our paperIs it China’s Lehman Brothers moment? Unveiling Evergrande debt crisis, financial risks, and regulatory implications’ published in the Law & Financial Markets Review, we delve into one of the largest corporate crises in human history—the Evergrande debt crisis. Ranked 122nd on The Fortune Global 500 List, Evergrande is a prominent Chinese property developer and corporate conglomerate with businesses spanning wealth management, theme parks, electric cars, internet companies, and mineral water. With a total liability of $300 billion, in recent years, it has failed to repay billions of dollars in loans to its creditors, including major banks and international bondholders.

The case study of Evergrande reflects the tightly intertwined links between financial markets and the real economy, as well as the fragile balance between financial stability and economic growth that policymakers often find hard to strike. The paper examines the causes and consequences of the Evergrande crisis. Then it explores relevant legal and regulatory challenges, particularly focusing on the protection of domestic and offshore financial investors and the concerns regarding financial stability with potential spillover effects. Here are our key findings:

I. The protection of domestic and offshore investors

The primary concern in Evergrande’s debt crisis is the likelihood of debt and equity investors, particularly retail investors, recovering their funds. Evergrande, listed in Hong Kong, has numerous shareholders globally, including Chinese Estates Holdings Limited and the US-based Vanguard Group. If Evergrande’s financial situation does not improve, its bondholders are likely to suffer losses on their principal. Chinese domestic banks and bondholders have a better chance of reclaiming their investments through formal civil proceedings or voluntary agreements with Evergrande, considering the company still possesses valuable assets, including over 1,000 real estate projects and relevant equity investments. However, offshore bondholders, owed over $20 billion, face limited legal options. Chinese law prohibits direct guarantees by China-incorporated companies for debt instruments issued by their offshore subsidiaries. To circumvent this, corporate bond issuers establish offshore special purpose vehicles (SPVs) that issue corporate bonds, often accompanied by a keepwell structure. This structure involves a contractual agreement between the Chinese parent company and its offshore subsidiary, assuring the latter’s financial health based on certain ratios or liquidity levels. Yet, the enforceability of such agreements remains uncertain, exposing global investors to significant investment risks in case of defaults and insolvency.

II. The implications for financial stability

According to our analysis, Evergrande’s debt crisis could also result in the build-up of vulnerabilities in China’s closely linked real estate, banking and non-banking financial sectors, endangering the stability of the financial system in China and potentially spilling over to international capital markets. A recent IMF Global Financial Stability Report considers the macro-financial transmission channels that could result in domestic and global financial instability. While the aggregate direct exposure of Chinese banks to Evergrande appear to be limited, exposure of the financial system to Evergrande could be substantial if stress spreads to the broader property development sector. A sharper-than-expected slowdown in the property market would lead to retrenchment of real estate investment with sizable effects on other private investments (for instance, construction materials, home appliances, and furniture) and shrinking revenues of local governments. A house price fall would result in weaker income and employment, and thus negatively affect private consumption. Clearly, deteriorating market confidence could quickly become a triggering event and push the financial system over the edge. Hence, our paper has suggested that policy and regulatory decisions to prevent and mitigate risks to financial stability should not be taken in silos. Macroeconomic policies must be considered alongside investor protection and potential distributional effects, as well as broader implications on the risk appetite of foreign investors.

III. Too big to fail (TBTF)

As the name Evergrande suggests, its essence is being big. It comes as no surprise that many market participants view Evergrande as ‘too big to fail’ (TBTF). With this title comes the corresponding market expectation of government intervention to avail its collapse. The current regulatory strategy for TBTF was designed with financial institutions in mind, with its most prominent manifestation during the 2007-08 financial crisis. However, with the growth of non-bank sectors providing financial services and potentially becoming systemically important, the journey to expanding the term to other corporations whose collapse would destabilise the financial system is short. It is probably the first time that we witness a non-financial business group that could potentially destabilise international financial markets. This complexity is exacerbated by the use of innovative financial structures and legal arrangements. Policymakers should, therefore, rethink the strategy of regulating large corporate conglomerates that have a borrowing capacity similar to banks’ deposit-taking function. Otherwise, a new round of financial crises with contagion effects will likely arrive ‘when the music stops’.

Lerong Lu is Senior Lecturer and Director of LLM Law & Technology Programme at The Dickson Poon School of Law, King’s College London.

Anat Keller is Senior Lecturer in Financial Law at The Dickson Poon School of Law, King’s College London.

The paper was presented at the ‘TELOS Private Law and New Technologies Conference’, King’s College London (April 2023).


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