GOOD MORNING FROM LONDON
How will China handle Evergrande? Answer – in a controlled manner.
The Government has been preparing for the crisis scenario since November 2018 when China’s central bank named Evangrande as one of the few financial holding conglomerates that could cause systemic risk. In March 2020, the company set targets to cut debt by $23.3bn a year for three years + in August 2020 was among 12 big developers called in to speak with regulators with a Three Red Line Warning.
Evergrande has now sold subsidiary businesses in an effort to meet all three red lines by the end of 2022 but, according to research institute Beike, it has failed to reach two targets despite paying down some debt.
Beijing has seen state-led restructurings of debt-laden groups recently including Huarong, the state-owned asset manager, and HNA, an aviation, logistics and tourism conglomerate. Evergrande, however, stands out because of its impact on Homebuyers who have pre-paid Evergrande for an estimated 1.6m flats that it has, allegedly, not delivered.
China’s critics hope that this is the beginning of the end – the collapse of the Socialist Experiment. But we have been here before – first, when Covid 19 first broke in January 2020 (with predictions of One Million Deaths) and, again, in April 2020 when China’s economy was predicted to collapse.
On both occasions, China defied the Critics. Covid deaths in China have not exceeded 5,000 (US/UK deaths are 740,000+) and the Chinese economy was the only major economy recording growth in 2020
The Chinese government could keep Evergrande afloat simply by allowing banks to loan it money, but the Government has decided to deal with the debt problem now rather than later.
China is Work In Progress. It has made big strides since 1949 and especially since 1979. But development is not plain sailing. These are uncharted waters. No country has ventured where China now treads. China succeeds if the Party succeeds – that is the dilemma for the West. And all the signs are that China remains focused and clear-sighted.