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China Tries to Reassure on Evergrande as Default Fears Rise
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China’s central bank expanded the supply of money for lending Monday as Beijing tried to reassure its public and investors the economy can be protected if a troubled real estate developer’s $310 billion mountain of debt collapses.Evergrande Group's struggle to turn assets into cash has prompted fear a default might chill Chinese lending markets and cause global shockwaves. Economists say the ruling Communist Party can prevent a credit crunch but it wants to avoid sending the wrong signal by bailing out Evergrande in the middle of a campaign to force companies to cut debt Beijing worries is dangerously high.To get more China finance news, you can visit shine news official website.
The People’s Bank of China said it released 1.2 trillion yuan ($190 billion) for lending by reducing the amount of money banks must hold in reserve. Beijing was expected to show support for lending after Evergrande warned Friday night it might run out of cash, but the central bank made no mention of the company, which it earlier accused of reckless borrowing.
“The company must be punished,” said economist He Fan at Peking University’s HSBC Business School.Developers have been racing to pay off debt since Beijing lowered limits on their use of borrowed money last year. Weaker real estate activity depressed economic growth to an unexpectedly low 4.9% over a year earlier in the last quarter.
The People's Bank said it wants to “support development of the real economy.” It said the reserve cut was no change in “prudent monetary policy.”
If Evergrande defaults, Beijing is likely to launch a two-track strategy of pumping money into credit markets while trying to prevent home prices from crashing if developers dump apartments in a “fire sale” to raise cash, said ING economist Iris Pang.
“It will be more of a semi-controlled market if that happens,” Pang said.Also Monday, Evergrande announced it formed a “risk management" panel including outside experts from a state-owned asset manager and other companies.Chinese leaders have coped with corporate debt crises but none as big as Evergrande.
The government in the southern province of Hainan seized HNA Group, an airline operator, in 2020 after it amassed $61 billion in debt during a global acquisition spree. The company in September proposed a plan under which creditors would be paid about 40% of what they are owed.
Reducing financial risks has been a priority for Chinese leaders since 2018. In 2014, they allowed the first bond default since the communists came to power in 1949. Defaults have gradually been allowed to increase in hopes of forcing borrowers and investors to be more disciplined.
Despite that, total corporate, government and household debt rose from the equivalent of 270% of annual economic output in 2018 to nearly 300% last year, unusually high for a middle-income country.Beijing reduced amounts real estate developers are allowed to borrow relative to their size last year. That blocks many from issuing new debt to pay off bonds as they mature.
Fantasia Holdings Group said Oct. 5 it failed to make a $205.7 million payment due to bondholders. Kaisa Group Holdings Ltd., warned last week it might fail to pay off a $400 million bond due Tuesday.Economic growth might sink further, but “the government believes the transformation of economic structures is more important,” said Peking University's He.
The government of Evergrande’s home province of Guangdong said it would send risk managers to the company's headquarters in the southern city of Shenzhen. Other provinces and major cities have set up “risk mitigation teams.”
“There is no good news,” the newspaper Economic Observer quoted a risk team member as saying. He said the public sees “only the tip of an iceberg” of Evergrande's problems.
Those problems are due to Evergrande's “poor management and blind expansion,” the central bank said Friday in an unusually stinging statement.
Regulators also are trying to root out hidden real estate investment risks at insurers and banks.
Insurers were ordered in November to disclose investment details, the business news magazine Caixin reported. It said regulators cited possible “illicit financing” but gave no details.
Economists say Evergrande won't be a “Lehman moment,” a reference to the 2008 collapse of Wall Street bank Lehman Brothers, the symbolic start of the global crisis.