How China wants to avert an Evergrande financial crisis

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“The government can put them under surveillance and pressure them through their employers or relatives not to cause problems,” said Minxin Pei, professor of government at Claremont McKenna College, who is writing a study on China’s national security apparatus.

China depends heavily on its ability to contain the aftermath of an Evergrande collapse. After Xi Jinping, China’s most powerful leader for generations, began his second term in 2017, he described containing financial risk as one of the “great battles” for his government. As he nears his likely third term, which would begin next year, it could be politically damaging if his administration poorly manages Evergrande.

But China’s problem may be that it controls financial panics too well. Economists inside and outside the country argue that its safeguards have pampered Chinese investors and they are too willing to lend money to large companies with poor repayment prospects. In the longer term, however, China’s greater risk may be following in the footsteps of Japan, which has experienced years of economic stagnation under the weight of huge debt and slow, unproductive businesses.

By not forcibly signaling a rescue package for Evergrande, the Chinese government is essentially trying to force both investors and Chinese companies to stop transferring funds to risky, highly indebted companies. There are risks to this approach, however, especially if a disorderly collapse of China angered host of homebuyers or unsettled potential investors in the real estate market.

Evergrande’s abrupt default on a large number of debt “would be a useful catalyst for market discipline, but it could also dampen the mood of domestic and foreign investors,” said Eswar Prasad, Cornell University professor of economics and former head of China International Monetary Fund.

Some global investors fear that Evergrande’s troubles represent a “Lehman moment,” an indication of the 2008 collapse of investment bank Lehman Brothers, which ushered in the global financial crisis. The Evergrande collapse, they warn, could expose other debt problems in China and hit foreign investors who hold Evergrande’s sizable debt and other real estate developers in the country.

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