China Handling the Evergrande Crisis, Without a Bailout
Sept. 27, 2021 (EIRNS)—From its first publication of a notice about the China Evergrande bankruptcy threat, EIR has noted that the People’s Bank of China and the bank regulators in Beijing were doing what had never been done, but should have been done, when big, speculative financial corporations threaten to fail. They were notifying Evergrande’s major bondholders to prepare for a large haircut, and compelling the company to direct its funds to fulfilling its contractual commitments to households and to the Chinese economy—in this case, completing construction of housing in which households had already invested.
On Sept. 23 this became very clear when Evergrande, clearly under direction of the regulators, did not make an $83 million interest payment on dollar bonds to international investors, and did channel funds toward accelerated completion of certain housing projects. Some financial websites like Zero Hedge referred to this as “step-by-step nationalization” of the company with an implicit pledge of credit for housing construction purposes only; but that is beside the point. The PBOC and regulators are taking an approach consistent with putting people first, and pursuing restructuring agreements for a large haircut on its debt with bondholders.
An article on Sept. 24 in Asia Times said: “Far from a Lehman moment, the Evergrande crisis was a preemptive popping of a bubble—the sort of action that U.S. authorities might have been wise to take in 2004 before the collapse of the U.S. housing market nearly took down the global banking system.” The article says the “bubble popping” will serve multiple objectives of China’s ongoing crackdown on leveraged, real-estate-based speculation of the kind which enabled—but did not cause—the 2007-08 global mortgage debt and derivatives meltdown. The liquidity crunch is evident elsewhere in the real estate sector, and another company, Sunac Corporation, is reportedly feeling the same crackdown now.
Of these objectives, it highlights the last: “Fifth—and most important—it will shift capital allocation toward high-productivity industries like manufacturing and away from construction, an inherently low-productivity occupation.”