Commentary: Beijing determined to make an example of crisis-hit Evergrande

HONG KONG: When asset bubbles burst, they usually follow a familiar script. Speculators go too far and prices get giddy before financial gravity is restored with a “pop”.

Only then do governments consider intervening to protect the public interest or save a company that is too big to fail.

But the deepening crisis surrounding China’s Evergrande, the most indebted property company in the world, is following a different narrative. It is Beijing’s restrictions on the property sector that lie behind Evergrande’s white-knuckle ride.

HAS BEIJING'S PAIN TRHESHOLD BEEN REACHED?

The anxiety felt by the company, its creditors and stock market investors will not abate until Beijing decides that a certain pain threshold has been reached.

“Investors … are rightfully asking where Beijing’s pain threshold falls, in terms of the slowdown in economic growth that would cause authorities to reverse course and ease controls toward the property industry,” said Logan Wright, a Hong Kong-based director at the Rhodium Group, a consultancy. 

“That turning point in policy is still far away,” he added. “Beijing is more likely to wait for signs of financial stress to materialise, rather than acting pre-emptively.”

Evergrande, which has more than US$300 billion in obligations to creditors and 778 projects under way in 223 cities, is taking a pummelling. Its Hong Kong-listed shares fell as much as 18.9 per cent on Monday (Sep 20) to their lowest level in about a decade.

Fitch, the rating agency, has slashed the credit rating on the company’s bonds and warned that a default of some kind “appears probable”.

BEIJING INTENT ON TURNING THE SCREW

But some big questions loom. Will the company be able to honour US$129 million of interest payments that come due on its bonds this month or the US$850 million that is due over the remainder of this year?

Should those payments to bondholders be prioritised above payments due on “wealth management products” held by tens of thousands of often low-income Chinese speculators? 

Of course, Beijing – which wields ultimate influence over a banking sector that is almost entirely state-owned – can issue an order at any time to bail Evergrande out.

But most analysts think Beijing is intent on turning the screw. It has decided to make an example of Evergrande in order to make clear to other property developers that it is serious about the “three red lines” laid down last year to reduce debt levels in the sector and rein in a chronic oversupply of residential space.

Nevertheless, it is equally clear that Beijing cannot afford to go too far. With a property sector that contributes 29 per cent of gross domestic product, any annihilation of Evergrande would impair the whole sector and set back a post-pandemic recovery in economic growth.

Thus, Beijing is engaged in a highly delicate exercise. It needs to inflict enough pain to show it is serious but not so much that it renders one of the most important engines of economic growth moribund.