Thu. Jan 20th, 2022

The central authorities have so far resisted the temptation to rescue the developers out, worried about creating “moral danger”.

Evergrande is the largest of a long list of Chinese developers – Fantasia, Simic, Sunshine, Kaisa and Aoyuan among them – who are experiencing serious liquidity problems as a result of a broken financing model and the impact their difficulties have had on demand in the sector.

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They have been cut off from the debt markets, and a core source of financing and cash, the pre-sale of apartments not yet built, has disappeared due to their inability to finance the completion (or even the start) of their planned development.

Central authorities have so far resisted the temptation to save developers, worried about creating “moral danger” and being seen to save billionaires, although Xi Jinping orchestrates a major shift in economic and social policy from encouraging wealth creation to redistribution of wealth.

Their efforts appear to be limited to trying to limit the fallout from the implications from the developers, which the People’s Bank of China says can be curtailed. Hui is said to be well-connected in Beijing, so it was notable that the PBOC blamed “poor management” and “ruthless” expansion for Evergrande’s problems in its response to Friday’s news.

The scale of Evergrande’s liquidity problems is frightening. Apart from the $ 260 million, it has an additional $ 82 million ($ 117 million) of payments that have been delayed for 30 days and therefore need to be made on Monday to avoid a formal default. It has an additional $ 255 million ($ 364 million), with the grace periods expiring at the end of January, and an additional $ 37 billion ($ 53 billion) or thereabouts to be repaid in June next year.

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Whether the authorities can prevent the implosions of Evergrande and its peers from infecting the broader economy will be the critical challenge for Beijing.

Until now, they had concentrated on trying to isolate the apartment buyers and suppliers to the sector from its struggles, and largely left it to Evergrande’s lenders and the other developers to devise their own answers. Their priority has been to keep suppliers and contractors afloat and make sure apartment buyers get what they paid for.

Evergrande and its advisers (including the world’s leading debt consolidation firm, US investment bank Houlihan Lokey) and the team from Guangdong, which have been sent in “at the request” of the company, will probably now speed up their efforts to agree on a restructuring of the group’s debt to creditors, especially international bondholders.

PBOC said on Friday that investors in the offshore bond market were relatively mature and sophisticated, and that there was a clear legal framework for dealing with their problems – ie. they can take care of themselves.

Whether the authorities can prevent the implosions of Evergrande and its peers from infecting the broader economy will be the critical challenge for Beijing.

Whether the authorities can prevent the implosions of Evergrande and its peers from infecting the broader economy will be the critical challenge for Beijing.Credit:Getty Images

A major restructuring, including major “cuts” and maturity extensions, could enable the group to be orderly wound up and avoid the formal, and inevitably messy, collapse that would cause dominoes to fly through the sector and its suppliers and threaten China’s financial and economic stability.

This process, which usually involves a lot of brinkmanship when creditors try to minimize their losses, will test China’s sensible decision that it will not release supposedly sophisticated creditors (especially foreign creditors) in private sector companies or create public safety nets under the wealth. of “ruthless” billionaire entrepreneurs.

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