by handsomeboh
Evergrande has been in danger of default for so long that financial analysts have been calling it a “car crash in slow motion”. The thing about super slow car crashes is that you can then put massive measures in place specifically designed to ensure that the rest of the economy doesn’t get affected.
Because the government regulators have the ability to make whatever policy they want, a whole battery of measures have been used to ringfence Evergrande’s risk.
(1) Banks have been told to report all their exposure to Evergrande, and then share it with other banks, so that no one bank is overexposed. In fact, it has been suggested that everyone from insurance companies to hedge funds have been told they need to take on some of this risk as well so it’s all spread out through the economy.
(2) Other real estate developers which don’t breach the rules have been given preferential access to other sources of funding, especially onshore bonds, bank loans, and asset backed securities. They have been also encouraged to sell assets like stakes in Property Services companies, and the ones which are least likely to default have even been encouraged to buy other companies.
(3) The government has stepped in directly to negotiate extensions on maturities and standstill agreements between banks and real estate developers which don’t breach the rules
(4) Real estate developers like Evergrande which do breach the rules have been placed under mandatory government-led restructuring. This is designed to prevent asset leakage and make sure the money / assets flow to creditors in the right order. The first creditors to get paid are the contractors/suppliers which prevents small companies from going under, followed by local banks with local claims over certain projects. This ensures that the projects remain in play, so the people who bought the homes don’t suddenly lose the house.
(5) Some interest rate cuts
Chinese regulators HOPE and PRAY that these measures are sufficient. And if they aren’t, they’ve still got a bunch of other measures like just nationalising those projects, directly backstopping the loans, or releasing cash held in escrow accounts meant to stop developers from using project funds to pay debt. Nonetheless, there is a real danger that this evolves into a complete shitshow. At the end of the day, a few very smart people are attempting to defuse one of the largest economic bombs the world has ever seen using precision tools that economists have never seen in practice before while political factions and international geopolitics swirls all around them. If they succeed it will be one of the greatest economic success stories we’ve ever heard; and it would be pretty normal if they failed (though it would cause a new financial crisis).