Financial pundits far and wide are trying to dismiss the impending Evergrande default as a "one-off", non-contagion-worthy incident. And let's hope that is the case. But I am watching out for another potential outcome. Evergrande has issued debt that is denominated in foreign currencies, I assume mostly USDs, and their local currency. Primarily foreign investors own the USD-denominated bonds while local investors primarily own the yuan-denominated debt. So, will the Chinese government allow/force Evergrande to default on foreign-denominated debt while making Chinese domestic debt holders whole? Just like any overly indebted entity, Evergrande can discriminate, outside of collateral agreements, as to who they will pay off and who they will not. The Chinese government can motivate Evergrande to make Chinese bond holders whole while leaving foreign bond holders "high and dry".
Essentially, this is what the FED and the US Congress did when the collateralized mortgage market blew up in 2008. Mortgage securities sold the world over held by countless sovereign wealth funds were allowed to default but when it was time for AIG to collapse, the FED stepped in and bailed out AIG, which we know was really just a thinly veiled bailout of Goldman Sachs, the Morgans and the other owners of the NY FED. Will China follow the same playbook? If so, how quickly does the M.O. of any defaulting entity take the same path? Do debt-ridden entities throughout the world just default