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Expect more testing time to follow when it comes to China

The market seems to breathe a sigh of relief that day as the Evergrande episode hasn’t worsened much this week as the company is expected to make coupon payments for its onshore bonds due tomorrow.

The Shanghai Composite cut earlier losses to turn positive now as US futures also pull slightly higher on the day, up 0.3% to 0.4%.

Given the prevailing sentiment, attention will turn to the Fed in the coming day, but don’t expect this to be the end of China’s worries. As mentioned yesterday:

The market is still focused on China in general, but there are many opinions circulating that Evergrande will not be the next Lehman Brothers.

There are a lot of valid points in this regard and I don’t expect China to risk a major collapse of its financial system, but that doesn’t mean local authorities are going to end the whole saga tomorrow.

Evergrande is on the brink and it’s clear the company is setting an example as China seeks to “clean up” key sectors of the economy. The problem with Evergrande is debt and what started with debt problems will in all likelihood end with an asset sale.

State actors can step in to try to ease the process and wipe out some of the bad deals, but the episode of Evergrande as a whole will be long and never-ending, so don’t expect a quick fix to the turmoil in the Chinese markets. .

On top of that, the government is also heavily cracking down on other key sectors besides real estate / construction which creates a lot of volatility and risk.

Contagion may not happen in the most obvious places, but you better beware in case it starts to dampen market sentiment on a global scale if the reverberations are strong enough – like the episode we have seen yesterday in the trade.

China will do what it can to comfort domestic markets by providing sufficient liquidity (watch the PBOC tomorrow) but don’t wait for direct responses to end all fears and anxieties.

Eventually the market will have to realize that China has moved to a new paradigm, and it is a paradigm that we will all have to learn to negotiate in the years to come.

The PBOC has already stepped in today with a big injection of liquidity and although there is a perceived calm everywhere, there have already been significant reverberations of this whole episode in the Chinese high yield market as well as the sectors. of construction and finance amid the current risks posed by Evergrande itself.