What Might Happen Next:
Scenario 1: Evergrande finds a way to restructure its debt, inject cash flow and avoid total collapse — Crisis avoided. (phew!!)
Scenario 2: Evergrande is unable to meet its debt obligations, receives no governmental help to meet such obligations, and collapses under its’ immense financial pressure. At best, this sparks fear in the market and nothing more. But there are fears that this could be much, much worse!
What if this starts a snowball of debt default in the Chinese housing market? What effects will that have internationally? Would such a crash spill over to leveraged property markets across the globe? At the very least, it will be a wake-up call to the West.
Scenario 3: The Chinese Central Bank uses its power over monetary policy to print capital and bail out Evergrande of its $300 billion debt. Whilst this would save Evergrande from collapse, it would not be without its consequences. The result of a government bailout would include yet another large capital injection into the monetary system, adding to China’s already high inflation.
Money Supply M2 in China. Source: tradingeconomics.com | People Bank of China
Assuming Evergrande receives a financial bailout, life will probably continue to stay normal (whatever that means nowadays), and the gears of the global debt economy will continue to turn as they have since the 2008 Global Financial Crisis.
One thing remains apparent, though — The sand in the economic hourglass just got a little closer to running out. Central banks simply cannot continue to bail out mismanaged companies to avoid a market recession. Market corrections are inevitable, and if history has shown us anything — The longer the pump, the harder the dump.