Evergrande: The only way out is monetary loosening.
Evergrande, a developer’s Hong Kong listed monster, looks like it could blow. However, considering that a default would be cataclysmic to the Chinese financial system, and the optics would be catastrophic to the residence market of China, it is much more likely that rescue services will take place, perhaps by forcing government-linked entities to overpaid the assets Evergrande was commissioned to sell. An unimaginable sign of weakness, as Xi Jinping is publicly weeping, would be a default, after all.
The latest bad news for Evergrande was the release on Thursday after news that a court in Guangzhou consolidated several litigation cases against Evergrande’s creditors. The consolidation unites Evergrande with cash flow from one part of the company into one part of the liquidity crisis, such as the one recently frozen by the Guangdong bank for some $20 million in deposits. The move is ominous, meaning it wants a bird’s eye view of about $2.3 trillion of Hong Kong (approximately US $300 billion) in obligations from Evergrande. Evergrande’s debt is $300 billion. And then I’m going to want to do something.
Evergrande’s cash scheme includes trying to sell 7 per cent of his internet business, HengTen Networks, to Water Lily Investment Ltd, to provide Caixon Group (0000918 SZ), to the IPO, for $418 million, and to reverse his earlier promise to pay a dividend. The company is sending the company to the company’s Evergrande Spring water business. This year, the company raised approximately $8 billion.
Sorry, that’s an ocean drop. Few think these steps will solve the problem if so much money is needed. Evergrande President Hui Ka-yan is likely to hold onto his wealth, however, the government will not allow an uncontrolled collapse. Think Tomorrow, Anbang, Dalian Wanda Think Tomorrow Group. The second richest person in China after Jack Ma is Hui on paper. He is far lower in profile and appears not to have Ma’s political ambitions, but is also in bed with Chinese officials, who are beautifully corrupt.
Evergrande presents a tangled problem for the monetary policy of China, which is explicitly committed to moderating debt and liquidity expansion. The debt of Evergrande amounts to around 2% of the GDP of China in 2020, which is 10% of the total Forex holdings in China. Without increasing its taproot to the fiscal balance sheet of the country, Evergrande itself will never fulfill its obligations. The only way is to give them money. So a loosening cycle must begin soon for the renminbi. In short, rescuing the Evergrande budget will have a significant impact on the fiscal health of the entire country.
China tried to stick to the line on bad credit refinancing. The context of “holding the lines” has to be seen: money is always up faster than GDP, because 1) the inefficient nature of China’s lending and 2) governments’ GDP growth targets that require billboard growth that is greater than the economy can deliver. In the first half of the year, the stock of renminbi loans grew at 12.6%, and the money supply (M2) grew 8.6%. This is considered restraint in the Chinese context. GDP supposedly grew by 12.7% in the first half, up from 6.8% in the same period in 2020 — when M2 increased by more than 11%.
Meanwhile, the government tries to prevent local governments from using sneaky refinancing strategies. In July, the Chinese banking regulator for example issued a document that told banks not to hide their debts from local governments by financing them off-balance sheet. They have not excluded the exchange of debt – they can no longer only cut it off. The state also reduced the reserve rate somewhat to send more money to the economy.
With the huge load of unoccupied, poorly situated, poorly situated, unlivable and ultimately insurmountable residential property, the Chinese economy is far from deferred, giving managers the chance to swell or otherwise easy way out of the deep holes the most vibrant neighborhoods in London, New York and San Francisco. The Evergrande was the pace vehicle for residential development in China, and gas run-downs will seriously damage this sector and Chinese households’ aging paper wealth.
But many options aren’t there. In 2022, the (recently) conventional two terms allowed by China’s leaders were finalized by Xi Jinping. He has made clear that he does not plan to retreat, but it may take more than intention to break the modern precedent, for instance, if Evergrande blows. For instance, if Evergrande blows, social stabilization and urban support for Xi’s agenda and tenure will be struck. More, more, more, more money is the best and probably only way to stop that disaster and that is to dig the hole in depth.