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In any other country, the sudden collapse of a corporate giant with over $ 300 billion in debt would send shockwaves through the economy. The headlines would explode. The banks would shake. Investors would panic.
A business collapse of this magnitude could happen soon. But that would be in China, where the Communist Party maintains a firm grip on money, corporate boards, the media, and society in general. These checks may be facing one of their toughest tests yet, but Beijing reports that it feels up to the challenge – even though it will try to teach big investors first and to businesses a bitter lesson in reckless lending.
The financial world is watching the struggles of China Evergrande Group, one of the biggest real estate developers on the planet and certainly the most in debt. Last week, a deadline for making an $ 83 million payment to foreign investors came and went with no indication Evergrande had fulfilled its obligations, raising questions about what would happen if its massive debt load turned sour.
Also Read: HSBC, StanChart May Face Secondary Shockwaves From Evergrande Crisis: Analysts
The Chinese government is unwilling to move in yet as it hopes Evergrande’s struggles will show other Chinese companies that they need to be disciplined in their finances, people familiar with its deliberations say who have insisted on anonymity. But he has an array of financial tools that he says are powerful enough to stem a financial panic if things get worse.
The government “will still provide a guarantee” for much of Evergrande’s business, said Zhu Ning, deputy dean of the Shanghai Advanced Institute of Finance, “but investors are going to have to sweat it out.”
Authorities have other ways to allay public unease over Evergrande. For months, local governments have issued guidelines urging Communist Party officials and businesses to watch for emerging protests linked to struggling Chinese real estate developers. Some notices warn authorities to watch for aggrieved homebuyers, unpaid contractors, and even fired real estate sellers.
“Follow the demand to spot them early, defuse them early, control early and deal early,” the southern China’s Lingshan County Housing Department said in a directive on possible protests earlier this year. “Managers of property development companies must personally take charge of handling petitions and maintaining stability.
Censorship of the press and social media makes it difficult for the general public to know the extent of Evergrande’s problems and for Evergrande buyers and investors to organize.
“The government can monitor them and put pressure on their employers or loved ones not to create problems,” said Minxin Pei, professor of government at Claremont McKenna College in California, who is writing a study on the device. China’s internal security.
China is relying heavily on its ability to contain the fallout from an Evergrande collapse. After Xi Jinping, the most powerful Chinese leader for generations, entered his second term in 2017, he identified controlling financial risk as one of the “great battles” for his administration. As a likely third term that begins next year approaches, it could be politically damaging if his government were to mismanage Evergrande.
Read also: DH decipherments | Why is the world shocked by the woes of a Chinese company?
But China’s problem may be that it controls financial panics too well. Economists inside and outside the country argue that its guarantees have pampered Chinese investors, leaving them too willing to lend money to large companies with poor repayment prospects. Longer term, however, China’s greatest risk may be that it follows in the footsteps of Japan, which has seen years of economic stagnation under the weight of huge debt and slow, unproductive businesses.
By failing to forcefully signal an Evergrande bailout, the Chinese government is essentially trying to force Chinese investors and companies to stop funneling money to risky and heavily indebted companies. Still, there are risks associated with this approach, especially if a messy collapse disrupts legions of Chinese buyers or anger potential investors in the real estate market.
A sudden default by Evergrande on a wide range of debt “would be a useful catalyst for market discipline, but could also deteriorate the sentiment of domestic and foreign investors,” said Eswar Prasad, professor of economics at Cornell University. and former director of the University of China. division of the International Monetary Fund.
Some global investors fear that Evergrande’s problems represent a “Lehman moment,” a reference to the collapse of investment bank Lehman Bros. in 2008, which heralded the global financial crisis. The collapse of Evergrande, they warn, could expose further debt problems in China and hit foreign investors, who hold massive amounts of debt from Evergrande, and other real estate developers in the country.
Chinese authorities believe they have the situation under control.
For starters, Beijing controls the country’s banking system to a degree that goes far beyond banking regulations in the West. The main lenders are public companies that prioritize the government’s economic policy over their own results. Rather than demand repayment, Chinese banks negotiated opaque deals with Evergrande for months.
Bank control also gives Beijing access to their vast ocean of money from the country’s deposits, providing a thick financial cushion.
China also strictly controls the movement of money across its borders. Chinese and global investors can’t suddenly head for exits if they are worried. These controls helped isolate China from an Asian financial crisis in 1997 and 1998 that severely damaged other regional economies.
Finally, the Communist Party firmly controls the courts, so any effort to force Evergrande into bankruptcy and dismantle it would require the approval of key leaders. In this way, the authorities can avoid a hasty sale, like that of Lehman in 2008, which could lead to discounted sale prices for land, apartments and other guarantees from Evergrande, as well as huge layoffs.
The Chinese government is confident that with a well-managed restructuring, Evergrande has enough assets to cover a large part of the company’s debts, people familiar with China’s economic policy-making said. Authorities have already calmly oversaw the dismemberment of Anbang and HNA, two empires riddled with debt, and forced the downsizing of a third, Dalian Wanda.
The influence of the state over large corporations can facilitate this process. A combination of the country’s largest state-owned real estate and construction companies could step in to complete Evergrande’s roughly 800 unfinished complexes and pay contractors. Officials see it as one of the benefits of expanding the public sector under Xi, which the party has promoted as an effort to ensure that the economic benefits of China’s growth are widely shared.
“State-owned enterprises will ensure that the apartments are delivered, to avoid social instability,” Zhu said.
The Chinese government has much less sympathy for foreign investors and large domestic investors, who are sophisticated and should know the risks, said people familiar with China’s economic policy making.
Chinese leaders can also supplement their financial tools by managing public perception and reaction. Since the construction industry became a mainstay of the Chinese economy in the 1990s, disputes between homebuyers and developers have sparked protests. Homebuyers, who often buy their apartments before they are built, have tried to unite over complaints of poor workmanship and broken promises.
Also read: Evergrande to wreak havoc in Chinese property sales and spur M&A
This month, for example, hundreds of homebuyers in Jingdezhen, a ceramic-making town in southern China, staged protests over fears Evergrande would collapse before it had finished giving in. legal ownership of their apartments.
The authorities reacted quickly. After the protests in Jingdezhen, a social media page operated by the government of a neighboring county warned that homebuyers could be arrested for protesting. He suggested that Evergrande would survive but that its leaders would be held to account. “People and businesses who go back on their word will certainly receive their deserved punishment,” read a post on the page.
Such measures can put an end to the troubles. But it might be harder to restore confidence eroded by Evergrande’s fault, Claremont McKenna’s Pei said.
“The economic impact is impossible to contain with a show of physical strength because the impact will be through consumer confidence and micro-level decisions made by millions” of businesses, he said. “It is a much more difficult challenge that would require adroit economic policy responses.”
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