The Evergrande bank heist
Chinese banks took control of $2 billion of Evergrande cash held by Evergrande Property Services, a unit of Evergrande. Surprisingly, the company expressed confusion about the transfer and said it is “investigating” how the banks claimed the funds. What does this tell us about China’s economy as the property sector spirals downwards? Our thesis is that the safety of the banks is the primary goal, followed by social stability, and lastly, economic growth. This has implications for the goals of future economic policy.
The curious bank grab
The loss of $2 billion to a collection of banks came as the regulators in Beijing were working through the recapitalization of Evergrande. This includes a complex negotiation between central and local governments, the banks and property developers. They all must decide on how to allocate debt, default or project completion. According to Caixin Magazine, the funds taken from Evergrande Property Services by the banks was likely to be used as collateral for the banks to lend to Evergrande’s affiliated companies.However, unless there were formal agreements in place for collateralized loans to affiliates, the banks would not accept the pledges. This may be difficult given the unusual transfer of Evergrande capital outside of the due diligence process.
This rather strange conflict between Evergrande and its banks tells a lot about future economic strategy. The debt workout at Evergrande has been complicated by the developer’s extensive – and previously unknown – set of off-balance sheet borrowing. There is increasing evidence that much of the property sector’s growth has been driven by many off-balance sheet transactions relying on uncertain legal principals. This raises a host of questions, including:
How much of the property market funding is off-balance sheet?
Are banks aware of these transactions? If they were, does that mean local governments used political pressure to force them to make loans despite the unknown extent of liabilities?
Did the CBIRC and PBOC know about these transactions – including the $2 billion to the banks -- or are they themselves still catching up to the full extent of the property industry’s balance sheet?
What does this chaotic debt workout mean for the future of the economy?
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