Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Analysis-For Xi and China Evergrande, a delicate balancing act

Stock MarketsSep 24, 2021 02:26AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
2/2 © Reuters. FILE PHOTO: A man rides a vehicle past the construction site of Evergrande Cultural Tourism City, a project developed by China Evergrande Group, in Suzhou's Taicang, Jiangsu province, China September 23, 2021. REUTERS/Aly Song/File Photo 2/2

By Andrew Galbraith

SHANGHAI (Reuters) -The crisis at property giant China Evergrande Group poses a $305 billion conundrum for President Xi Jinping: how to impose financial discipline without fuelling social unrest.

With one year before the Chinese president is poised to secure an unprecedented third five-year term, the stakes are high during what is proving to be the most consequential period of his tenure.

Evergrande's borrow-to-build model was enabled by a government reliant on property sales for revenue and unwilling to bite the bullet on runaway indebtedness for fear a collapse in prices would have devastating consequences for a country in which property accounts for 40% of household wealth, analysts, academics and economists say.

Xi, who has unleashed a spate of industry and societal reforms this year in the name of "common prosperity https://www.reuters.com/world/china/unleashing-reforms-xi-returns-chinas-socialist-roots-2021-09-09", has made clear that the excesses of decades of breakneck growth powered by a relentless rise in property prices and debt must be brought to heel.

But shared responsibility for Evergrande's crisis - and worries about the repercussions of a messy collapse - complicate decisions on the fate of a conglomerate with $305 billion in debt that is scrambling to pay creditors, including bondholders owed $83 million in a coupon payment https://www.reuters.com/world/china/china-evergrande-bondholders-limbo-over-debt-resolution-2021-09-24 that was due on Thursday.

"The government has to some degree caused the problems at Evergrande," said Andrew Collier, managing director at Orient Capital Research, citing debt ratio caps, known as the "three red lines", placed on developers in 2020 that put Evergrande under significant stress and forced it to start to sell assets.

Those caps followed renewed official concern last year over property sector froth after monetary easing to cushion the impact of COVID-19 drove surging sales and signs of speculative overbuilding by developers.

But clamping down on property prices is difficult given the fiscal dependence on the sector. Local governments, which Orient Capital estimates account for 89% of total government spending, derived more than 40% of revenues from land sales in 2020, driving a codependent relationship with developers.

"(Developers) seem to get caught up in the political economy ... which effectively leads to a tremendous number of bad decisions because you're now making investments based on political whim and political winds, rather than actual sound business sense," said Fraser Howie, author of several books about China's financial system.

China's State Council Information Office did not immediately reply to a faxed request for comment.

DEEP ROOTS

The roots of the crisis date to tax reforms in 1994, which bolstered central government coffers but left local governments reliant on land financing for revenue, said Alfred Wu, associate professor at Lee Kuan Yew School of Public Policy in Singapore.

That triggered a rise in property prices and the growth of developers like Evergrande, which thrived in third- and fourth-tier cities.

"Evergrande is a cash cow for regional governments. If the company goes bust, the model of land-financing and regional governments will go bust, too. The central government won't allow that," Wu said.

Despite years of warnings from some quarters about the business model used by Evergrande and others, which has included taking on heavy debt to spur land and project acquisitions, the company was hardly a rogue operator.

Chairman and majority shareholder Hui Ka Yan https://www.reuters.com/world/china/evergrandes-billionaire-boss-exudes-calm-debt-risks-grow-2021-09-01 took pains to show off his close alliance with Beijing and the ruling Communist Party, and was reciprocated.

Included in a list of Hui's achievements in Evergrande's 2020 annual report are being named a "national model worker", an award-winning poverty fighter and an "Excellent Builder for the Socialist Cause with Chinese Characteristics".

GREAT AWAKENING

Stability-obsessed Beijing is well aware that the rise in the housing market created not only great wealth but deep inequality.

One portfolio manager based outside China who declined to be identified said the 2019 anti-government protests in Hong Kong, blamed partly on inequality fuelled by sky-high housing costs, were a wake-up call for Beijing.

This year, Xi has set out to reform the "three huge mountains" https://www.reuters.com/world/china/no-gain-without-pain-why-chinas-reform-push-must-hurt-investors-2021-07-28 of housing, education and healthcare to rein in soaring costs for city dwellers as a way to shore up legitimacy as the "people's leader", analysts said.

Protests by disgruntled suppliers, home buyers and investors last week illustrated discontent that could spiral in the event a default sparks crises at other developers.

UBS estimated there are 10 developers with potentially risky positions accounting for combined contract sales of 1.86 trillion yuan ($287.92 billion), nearly three times Evergrande's total.

Still, many analysts say a wider crisis is unlikely, predicting that authorities would choose a route of squeezing the overall property sector while addressing individual problems as they arise.

"The government knows that if it doesn't handle Evergrande carefully and lets it go bankrupt, disgruntled homeowners and shareholders could cause social instability, loan defaults could lead to financial risk, massive layoffs could add to employment woes, and private firms could be further spooked," said Tang Renwu, who heads the School of Public Administration at Beijing Normal University.

($1 = 6.4602 Chinese yuan)

Analysis-For Xi and China Evergrande, a delicate balancing act
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email