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Beijing’s silence on impending Evergrande collapse has analysts split over next move

Most financial analysts see bailout unlikely as China faces its latest ‘grey rhino’

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An aerial view of an Evergrande new housing development project is under construction in Beijing, Wednesday, Sept. 22, 2021.  (AP Photo)

An aerial view of an Evergrande new housing development project is under construction in Beijing, Wednesday, Sept. 22, 2021.  (AP Photo)

TAIPEI (Taiwan News) — Persistent default fears eclipsed efforts by the chairman of China Evergrande Group to boost confidence in the embattled firm, with its shares falling by as much as 7% before trading ended for Tuesday (Sept. 21).

Yet Beijing has given no signal it will intervene to keep the crisis from shattering confidence across the global economy, leading analysts to debate whether a bailout is imminent.

Evergrande Chairman Hsu Chia-yin (許家印) sent a letter to employees over the Mid-Autumn Festival weekend claiming the company will "walk out of its darkest moment" and deliver property projects as pledged, according to a Reuters report.

"I firmly believe that with your concerted effort and hard work, Evergrande will walk out of its darkest moment (and) resume full-scale construction as soon as possible," said Hsu.

Clarity needed

"We are uncertain of how far and how strong the ripple effect would be on the housing market and the developer industry,” analysts at Deutsche Bank have said. “We think investors should remain on the sideline until there is more clarity.”

Asked what moves Beijing will make next to contain the spillover, Andrew Collier, managing director of Orient Capital Research, predicted involvement of state proxies. "There must be negotiations behind the scenes about a systemic recapitalization (of Evergrande) by state proxies," he said.

"If one piece of Evergrande's debt is allowed to default, it would trigger questions about all of their remaining debt from investors, and the government doesn't want a wider crisis like that," he said.

Most hedge fund managers told Reuters they were not yet concerned about the risk of a contagion spreading into other equities markets, yet a default by Evergrande has been widely anticipated by some.

"I would characterize Evergrande as a telegraphed and controlled detonation," said Samy Muaddi, portfolio manager for the T. Rowe Price Emerging Markets Bond fund. "If an investor was still investing in Evergrande, they were investing against Chinese policy makers, which is a good way to lose."

"I think (Evergrande's) equity will be wiped out. The debt looks like it is in trouble, and the Chinese government is going to break up this company," said Andrew Left, founder of Citron Research and one of the world’s best-known short-sellers.

"But I don't think that this is going to be the straw that breaks the global economy's back," said Left, who in June 2012 published a report that said Evergrande was insolvent and had defrauded investors.

Bailout Unlikely

S&P Global Ratings said in a report on Monday (Sept. 20) that it does not expect Beijing to provide any direct support to Evergrande.

"We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy," the rating agency said.

The South China Morning Post’s Zhou Xin agrees this is unlikely to be a repeat of Lehman Brothers since China has much more control over its creditors than the U.S. does.

Zhou, who described Evergrande as China's latest “grey rhino” — a term coined by Michele Wucker for obvious threats that are ignored and commonly used to describe slow responses to the COVID-19 pandemic — sees the solution as “another cocktail of proven tricks.” This mix of policies would include rolling over debt, trimming down assets, and emergency payments to those left most vulnerable by the defaults.

Zhou expects Evergrande to be a “slow burnout rather than a quick meltdown.”

Discipline “overkill”

Meanwhile, the Financial Times is anticipating a “controlled explosion.” The outlet says Beijing will deliberately teach the property behemoth a “very public and painful lesson” to impress on industry players that it is serious about enforcing restrictions on debt levels.

While the publication does not see a high chance of a global downturn like in 2008, it warned Evergrande could dramatically slow China’s own economic growth if Beijing’s “zeal to teach Evergrande a lesson” results in “overkill” by preventing other developers from “accessing the financing they desperately need.”