Beijing’s Evergrande solution

CHINA ADVISORY - Report 06 Oct 2021 by Andrew Collier

Beijing believes the risks of a US-style financial crisis caused by a property bubble outweigh the risks of an Evergrande default. But it is also encouraging a “soft” landing for the resolution of Evergrande’s debt problems that would avoid political unrest and a bank crisis. How will Beijing resolve this conflict?

Beijing plans to force the local governments to resolve debt issues locally. This passes the responsibility from the center to the periphery. The Politburo’s attitude is that the provinces have benefited from the success of companies like Evergrande, so it is up to them to solve it. This absolves the center’s financial responsibility.

More importantly, the geographic diversity of debt solutions is likely to avoid a systemic problem in the economy or financial system. One question is crucial: What is the capacity of local governments to absorb Evergrande’s debt?

Local governments have limited resources. Hidden debts, primarily from local government companies, reached 45 trillion yuan at the end of last year, equivalent to 44 percent of GDP. Some sell-side economists believe that this level of debt, coupled with Covid-19, earlier deleveraging campaigns and the stock market crash of 2015, will convince the central government to step in to bail out Evergrande. I doubt it. Beijing clearly believes now is the time to accept the pain. The trade war has created a common political enemy, and Xi Jinping is solidifying his authority.

Now read on...

Register to sample a report

Register
Sign-in
Forgot your password?
Copyright 2024 GlobalSource Partners. All rights reserved. This report is prepared for GlobalSource Partners’ clients and may not be redistributed, reproduced, stored in a retrieval system, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of GlobalSource Partners. This report is distributed simultaneously to our website and other portals used by GlobalSource Partners. The information herein was obtained from various sources and is believed to be reliable but GlobalSource Partners does not warrant its completeness or accuracy. Neither GlobalSource Partners nor any Country Analyst, officer or employee accepts any liability whatsoever for any direct, indirect or consequential damages or losses rising from any use of this report or its contents.