Markets sold off on Monday amid worries about Chinese property giant Evergrande's massive debt load, and one China expert warns that there is more agony coming for anyone connected to Evergrande.
"There's going to be a lot of pain — almost everybody involved with this is going to get a chunk taken out of them, if not worse," Leland Miller, CEO of China Beige Book, told Yahoo Finance (video above).
Evergrande currently has over $305 billion in liabilities, and some worry about the potential risks to the Chinese financial system and global contagion were the company to fold.
"At the end of the day, there will be the ability of the [Chinese] government to step in and create an outcome that avoids worst-case scenarios... but I don't think it wants to step in just yet," said Miller. "They want to make sure there's plenty of pain... and everyone involved in Evergrande... [needs] to learn their lesson. And then at a certain point, the government will step in, but it's going to be ugly — there's no question about that."
The Evegrande saga comes amid a Chinese government crackdown on various sectors, and Miller noted that Beijing wants to teach the domestic market a lesson without causing too much damage globally.
"If you want to teach a lesson, you have to cause pain," Miller said. "But at the end of the day, you don't want the contagion to hit all sides of the Chinese economy. And one of the things that Beijing can do ... is be able to step in and order lenders to lend and order suppliers to supply and order bond holders to negotiate."
Some Western investors are worried about a possible slide into socialism after decades of capitalist-style policies and tremendous growth.
"I think this crisis will move along, I think it will fade into the background, markets will recover pretty quickly, maybe as quickly as tomorrow," Giles Coghlan, chief analyst at HYCM, told Yahoo Finance Live in a separate interview. "But the wider issue is: Is this a bigger from President Xi? Is he moving away from Western-style capitalism, back more closely to socialism? ... That on a medium-term perspective may be more worrying for investors."
Miller noted that Beijing is ultimately trying to address perceived risks to the country's economy.
"Right now, there is a paradigm shift going on right now where China is willing to accept lower growth in order to de-risk the system," he said. "It's been a reform effort that has pushed off for years, but it looks like it's begun."
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Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected]. Follow her on Twitter @aarthiswami.
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