[Control of the banking system
gives Beijing the tools to stop a broader collapse, officials believe, while
censorship and police powers can stifle protests.]
A corporate collapse of that scale
may happen soon. But it would be in China, where the Communist Party keeps a
firm grip on money, corporate boardrooms, the media and the broader society.
Those controls may be facing one of their toughest tests yet, but Beijing is
signaling that it feels up to the challenge — even if it will first try to
teach big investors and companies a bitter lesson about lending recklessly.
The financial world is watching the
struggles of China Evergrande Group, one of the largest property developers on
earth and certainly the most indebted. Last week, a deadline to make an
$83 million payment to foreign investors came and went with no
indication that Evergrande had met its obligations, raising questions about
what would happen if its huge debt load went sour.
The Chinese government doesn’t want
to move in yet because it hopes Evergrande’s struggles will show other Chinese
companies that they need to be disciplined in their finances, say people with
knowledge of its deliberations who insisted on anonymity. But it has an array
of financial tools that it believes are strong enough to stem a financial panic
if matters worsen.
The government is “still going to
provide a guarantee” for much of Evergrande’s activities, said Zhu Ning, deputy
dean of the Shanghai Advanced Institute of Finance, “but the investors are
going to have to sweat.”
The authorities have other ways to
quell public unease about Evergrande. For months, local governments have been
issuing directives urging Communist Party officials and companies to look out
for budding protests related to China’s troubled property developers. Some
notices warn officials to monitor aggrieved home buyers, unpaid contractors and
even laid-off real estate salespeople.
“Follow the demand to spot them
early, defuse early, control early and deal with early,” the housing department
of Lingshan County in southern China said in
a directive about possible protests earlier this year. “The heads of
property development firms must personally take in hand the work of dealing
with petitions and maintaining stability.”
Censorship of the press and social
media makes it hard for the general public to know about the extent of
Evergrande’s troubles and for Evergrande home buyers and investors to organize.
“The government can place them
under watch and pressure them through their employers or relatives not to make
trouble,” said Minxin Pei, a professor of government at Claremont McKenna
College who is writing a study of China’s domestic security apparatus.
China has a lot riding on its
ability to contain the fallout from an Evergrande collapse. After Xi Jinping,
China’s most powerful leader in generations, began his second term in 2017, he
identified reining in financial risk as one of the “great battles” for his
administration. As he approaches a likely third term in power that would start
next year, it could be politically damaging if his government were to mismanage
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 coddled Chinese investors, leaving them too
willing to lend money to large companies with weak prospects for repaying it.
Over the longer term, though, China’s bigger risk may be that it follows in the
footsteps of Japan, which saw years of economic stagnation under the weight of
huge debt and slow, unproductive companies.
By not forcefully signaling an
Evergrande bailout, the Chinese government is essentially trying to force both
investors and Chinese companies to stop channeling money to risky, heavily
indebted companies. Yet that approach carries risks, especially if a disorderly
collapse upsets China’s legions of home buyers or unnerves potential investors
in the property market.
An abrupt default by Evergrande on
a wide range of debts “would be a useful catalyst for market discipline, but
could also sour both domestic and foreign investor sentiment,” said Eswar
Prasad, an economics professor at Cornell University who is a former head of
the China division at the International Monetary Fund.
Some global investors worry that
Evergrande’s problems represent a “Lehman moment,” a reference to the 2008
collapse of the Lehman Brothers investment bank, which heralded the global
financial crisis. Evergrande’s collapse, they warn, could expose other debt problems
in China and hit foreign investors, who hold considerable amounts of Evergrande
debt, and other property developers in the country.
Chinese officials believe they have
the situation under control.
For starters, Beijing controls the
country’s banking system to a degree that goes far beyond bank regulations in
the West. The major lenders are state-owned companies that prioritize the
government’s economic policy over their own bottom lines. Rather than demand
repayment, China’s banks have negotiated opaque deals with Evergrande for
months.
Control of the banks also gives
Beijing access to their vast ocean of money from the country’s deposits,
providing a thick financial cushion.
China also strictly controls the
movement of money across its borders. Chinese and global investors can’t
suddenly head for the exits if they get worried. Those controls helped insulate
China from an Asian financial crisis in 1997 and 1998 that heavily damaged
other regional economies.
Finally, the Communist Party firmly
controls the courts, so any effort to force Evergrande into bankruptcy and take
it apart would need approval from top leaders. So the authorities can avoid a
rushed sell-off like Lehman’s in 2008, that could result in fire-sale prices
for Evergrande’s land, apartments and other collateral, along with huge
layoffs.
The Chinese government is convinced
that, with a properly managed restructuring, Evergrande has enough assets to
cover a sizable majority of the company’s debts, said people familiar with Chinese
economic policymaking. Officials have already calmly overseen the dismemberment
of Anbang and HNA,
two debt-laden empires, and forced the shrinkage of a third, Dalian
Wanda.
State influence over major
companies can help with that process. Some combination of the country’s biggest
state-owned real estate and construction companies could step in to complete
Evergrande’s roughly 800 unfinished complexes and pay off contractors. Officials
see that as one of the benefits of the state sector’s expansion under Mr. Xi,
which the party has promoted as an effort to make sure the economic benefits of
China’s growth are broadly shared.
“The state-owned enterprises will
make sure the apartments are delivered, to avoid social instability,” Mr. Zhu
said.
The Chinese government has much
less sympathy for foreign and large domestic investors, who are sophisticated
and should know the risks, said people familiar with Chinese economic
policymaking.
Chinese leaders can also supplement
their financial tools by managing public perception and response. Ever since
the construction industry became a mainstay of China’s economy in the 1990s,
disputes between home purchasers and developers have led to protests. Home
buyers, who often purchase their apartments before they are built, have tried
to unite over complaints about shoddy workmanship and unfilled promises.
This month, for example, hundreds
of home buyers in Jingdezhen, a ceramics-making city in southern China, organized protests over
fears that Evergrande would collapse before it finished handing over legal
ownership of their apartments.
The authorities responded quickly.
After the protests in Jingdezhen, a social media page operated by a nearby
county government carried warnings that the home buyers could be arrested for
demonstrating. It suggested that Evergrande would survive but that its managers
would be held to account. “People and businesses that go back on their word
will certainly receive their deserved punishment,” read an
article on the page.
Such steps can douse unrest. But it
could be harder to restore confidence eroded by an Evergrande default, said
Professor Pei of Claremont McKenna.
“The economic impact is impossible
to contain with a show of physical force because the impact will work through
consumer confidence and micro-level decisions made by millions” of businesses,
he said. “That’s a far tougher challenge that would require adroit economic
policy responses.”
Chris Buckley contributed
reporting from Sydney, Australia.