China’s largest football club, Evergrande, has been in a state of turmoil for the past five years. In the midst of this chaos, the team has made a decision to enter into a partnership with Alibaba Group and become one of the first sports clubs to be backed by an e-commerce company.
Beijing’s Time for Evergrande Choosing is a blog that covers everything related to China. It features news, reviews, and opinions on the latest happenings in China.
The headquarters of the Evergrande Group in Shenzhen, Guangdong Province, China.
Photo credit: Shutterstock/Alex Plavevski
One of Asia’s best-kept mysteries is whether Beijing has a big plan to cope with the slow-motion collapse of property behemoth Evergrande Group. It’s obvious that Xi Jinping’s government would intervene to safeguard at least some of Evergrande’s creditors, but there’s a lot of ambiguity about who will profit and how.
Evergrande’s difficulty handling more over $300 billion in liabilities has been known to investors and Chinese policymakers for months. The firm has missed three coupon payments on bonds issued outside of China since August, but due to 30-day grace periods, it is not in default.
However, no one knows what Beijing’s plans are. It seems that a direct rescue to keep Evergrande in its present shape is improbable. Beijing’s efforts to bring down property prices and decrease real-estate debt are part of a larger push to do so. Evergrande will also be denied a Western-style orderly bankruptcy based on creditor seniority. This would give investors more confidence in China’s rule of law.
However, the Communist Party will not jeopardize the small companies that supply Evergrande or the house purchasers who have paid for apartments that are yet to be built. In a conventional bankruptcy, such creditors might lose a lot of money, which is why some have protested outside Evergrande’s headquarters. Mr. Xi just cannot afford any more civil unrest.
Beijing’s strategy seems to be to kick the can down the road for the time being. Beijing seems to be putting pressure on banks to postpone interest payments, and it appears to be ready to pass over unfinished construction projects to other developers. The Rhodium Group’s Logan Wright refers to this as the “silent bailout” since it occurs without Beijing announcing a plan.
It’s anyone’s guess what will happen after that. Foreign investors believe, probably rightly, that they will lose a lot of money, but no one knows how much money they will lose. The foreign market for Evergrande and other property firms’ bonds is roiled by the uncertainty.
The issue with Evergrande’s suppliers may be the most difficult. In China’s gray financial system, many have turned accounts receivable into transferable credit that flows like money. Failure to repay may put you in a financial bind. Unorthodox remedies, such as giving creditors property instead of cash, may drain more liquidity from the economy than Beijing wants.
Beijing is also concerned about families who have purchased Evergrande-backed wealth management products. These are unregulated financial instruments, similar to bonds, that banks and others promote as a “secure” high-interest alternative to low-interest savings accounts. Allowing these products to fail would put middle-class savings in jeopardy and may lead to greater political upheaval.
Mr. Xi is running out of time to go from a covert bailout to a more open one. Greater insight comes with its own set of dangers. If people and investors believe Beijing’s strategy is inadequate, they may respond negatively. Silence, on the other hand, is becoming more hazardous as the uncertainty extends to other businesses.
After the 2008 financial crisis, Americans can testify that Beijing isn’t the first government to depart from conventional bankruptcy procedures. If that isn’t the intention, authorities should inform citizens and investors about it.
Kim Strassel, Jason Willick, Mene Ukueberuwa, and Dan Henninger discuss the best and worst of the week. Bloomberg photo
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