After dithering for months, Beijing has made its intentions explicit. It will execute a plan to deal with the Evergrande threat to China’s financial system and by extension to the global financial system.
There was action a couple of weeks ago, hinted at Beijing’s hand, when a state-owned enterprise paid a handsome sum for Evergrande’s interest in a commercial bank. The payment enabled Evergrande to avoid a formal declaration of default by delivering an already late interest payment on its dollar-denominated debt. But that was only a hint.
Now Beijing has issued a comprehensive set of steps to engage the Evergrande problem and no doubt future problems from others like it that will surely follow.
In the infinite detail of this new plan, Beijing effectively proposes a staged bankruptcy for the massive real estate developer and burgeoning conglomerate. In it, Beijing will supervise the sale of Evergrande assets—largely to state-owned enterprises—with an eye to meeting the company’s obligations to its creditors and its suppliers, and especially to see to it that some 1.5 million householders who prepaid for Evergrande apartments will either get what they contracted for or a refund.
Initial reports suggest that the many moving parts of Beijing’s arrangement are proceeding slowly. It will no doubt take years to resolve the Evergrande matter. The effect will also become larger and still more involved over time, for all indicators suggest that Evergrande is not alone. Other developers have already defaulted—Fantasia Holdings Group Company for one, and Sunshine 100 China Holding for another. These firms are smaller than Evergrande, but likelihoods suggest that there are still more. After all, China’s long rapid expansion must have prompted other firms, eager to take advantage of the opportunities implicit in such growth, to issue debt that has become harder to shoulder now that Chinese growth has slowed.
Clearly, Beijing will be working this new model for some time to come. It must, for if the debt default problem got much larger without support from Beijing, it would undermine the confidence needed to make Chinese finance function at all. The pattern was evident in America’s financial crisis of 2008-09. Widespread debt problems caused all involved in finance to doubt whether others could meet their financial obligations, prompting lenders as well as investors to hold back on all deals.
Only government support could restore confidence, allow financial actors to move again, and prevent the financial paralysis from dragging the economy down more than it already had. Now China faces such a moment. Only Beijing has the resources to reassure all involved that others can meet their obligations and so prevent a cascade of failure and distrust that would otherwise render the financial system inoperable.
Given how long Beijing dithered as the news of financial ruin filtered out, it is comforting in the extreme that central authorities have at last begun to take matters seriously. Beijing never had the luxury of neglect. Some have fret about the moral hazard involved in effectively bailing out failure. Moral issues are not insignificant, but they can be dealt with in time. The need now is less to punish and assign blame than to ensure confidence within Chinese finance, and in doing so protect the Chinese economy from the pitfalls implicit in that loss of confidence.
However frustrating and troubling China is on other fronts, no one should want Chinese financial arrangements to fail and certainly not that the Chinese economy should slow more than it has or fall into recession. Aside from the human concerns implicit in such a situation, disruption in China would certainly spread around the world. On all these bases, Beijing’s latest moves are very welcome indeed.
