A sovereign default in China is not off the table, but American investors are unfazed, according to a BofA Merrill Lynch survey released Monday, as a bond default by Evergrande REIT looms.
The poll of 10,000 respondents found that nearly two-thirds (61 percent) said a sovereign default is more likely in the next year and that the crisis at Hong Kong’s Evergrande REIT is “the biggest indicator the China credit bubble will burst and lead to contagion within the China market in the coming months.”
More than half (57 percent) said they expect a greater financial crisis in the next 12 months than in the past 12 years, with the number who expect it rising to 65 percent if the U.S. economy suffers another credit shock.
As for a sovereign default by China, 53 percent of respondents said it was more likely than a Chinese sovereign default and 64 percent were “even more so” if the U.S. economy went under another shock. Only 7 percent said a Chinese sovereign default was “less likely.”
The BofA Merrill Lynch Survey “is not really out of the ordinary, because we are already in the fifth year of what seems to be a dangerous lending boom in China,” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia, told CNBC.
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LeBas said it’s not unreasonable to look at the rise in interest rates and rising bad loan rates at Chinese banks and see that “we’re probably in for a bit of a rough patch.”
Evergrande REIT, a real estate investment trust, needs to repay bonds this month after a disappointing profit last week. China’s regulators have been rolling out so-called forbearance programs to help the company’s bondholders.
“We expect Evergrande to [make] a ‘Lehman Moment’ at the end of this year,” said Lee Westerfield, chief investment officer of Farallon Capital Management, adding that it’s “not yet time to sell off China assets.”
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Zhang Ming, chief investment officer of Guotai Junan International Asset Management, told CNBC that Evergrande REIT isn’t the only Chinese company facing a “problem.”
“The higher the balance on the balance sheet and the earlier, the greater the chance that a bad loan ratio will rise,” Zhang said.
Zhang also said the many small Chinese companies listed in Hong Kong, such as Evergrande REIT, represent a “dangerous treasure trove” for “single-digit” growth-rate products.
LeBas said the upcoming “Lehman Moment” will likely not be felt in the United States and that it might not be true that “the United States is next.”
“A lot of Chinese companies are doing things over here and servicing credit back in China that, to the rest of the world, appears quite normal,” he said.
Instead, he said investors should read more into a further decline in the value of the yuan.
“The bottom line is, if the Chinese are doing a lot of business, exporting a lot of goods, making a lot of money and they’re not concerned about a crisis in their home country, what’s to say that the U.S. cannot?” he said.
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“We are most definitely worried about the future Chinese economic growth,” Zhang said. “And we’re also concerned because the U.S. and European economies are not necessarily set to do well in the long run.”
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