China won't let Evergrande fail, and that should spur a market rebound, economist Ed Yardeni says

Published Tue, Sep 21 20219:23 AM EDTUpdated Tue, Sep 21 202111:01 AM EDT

The likelihood that the Chinese government won't let real estate giant Evergrande fail should help calm investors' frayed nerves, economist Ed Yardeni said. Markets have been rattled for several days over concerns that the developer, which has about $300 billion of liabilities owed to hundreds of institutions, could spread financial contagion similar to what happened when U.S. investment bank Lehman Brothers capsized about 13 years ago. However, Yardeni said such a scenario is unlikely. Once investors get that message, the recent market tumult should subside, he said. "Chinese government officials are well aware of the headlines comparing Evergrande to Lehman," Yardeni said in a note to clients Tuesday. "They are well aware of the consequences of letting the firm fail. So they'll intervene to restructure it. When, they do, stock markets around the world should enjoy relief rallies." Indeed, stocks already looked like they were set to recover Tuesday from an aggressive sell-off in the previous session. Monday saw the biggest market losses since July, with the Evergrande situation contributing to other fears on investors' minds lately. This week's Federal Reserve meeting, debt ceiling negotiations in Congress and worries that the economic expansion is cooling also are fueling a pullback in stocks that are around record valuations. As far the Evergrande situation, Yardeni said Chinese officials could learn from it. The company has been a major developer of apartment buildings at a time when the population is getting older and needs more senior housing. "Perhaps China needs to be building more nursing homes and fewer apartment buildings," wrote Yardeni, president of Yardeni Research. He added that the situation is less analogous to Lehman and more like what happened with Long-Term Capital Management, a hedge fund that needed to be rescued in 1998 due to overexposure to Russian debt. The 2008-09 Lehman-inspired financial crisis "confirmed that Lehman was too big to fail," Yardeni said. "LTCM was restructured by the Fed with the help of the major banks in the U.S. Lehman turned a garden-variety bear market in the stock market into a ferocious bear market. LTCM triggered a garden-variety correction." From a markets perspective this time, Yardeni also said copper prices could start to move lower as they often trace the path of Chinese equities, which have been on a sharp downward track since mid-February. Become a smarter investor with CNBC Pro . Get stock picks, analyst calls, exclusive interviews and access to CN