BEIJING — In any other country, the sudden collapse of a corporate titan with more than $300 billion in debt would send shock waves across the economy. Headlines would blare. Banks would shudder. Investors would panic.
A corporate collapse of that scale may happen soon. But it would be in China, where the Communist Party keeps a firm grip on money, corporate boardrooms, the media, and the broader society. Those controls may be facing one of their toughest tests yet, but Beijing is signaling that it feels up to the challenge — even if it will first try to teach big investors and companies a bitter lesson about lending recklessly.
The financial world is watching the struggles of China Evergrande Group, one of the largest property developers on earth and undoubtedly the most indebted. Last week, a deadline to make an $83 million payment to foreign investors came and went with no indication that Evergrande had met its obligations, raising questions about what would happen if its colossal debt load went sour.
The Chinese government doesn’t want to move in yet because it hopes Evergrande’s struggles will show other Chinese companies that they need to be disciplined in their finances, say people with knowledge of its deliberations who insisted on anonymity. But it has an array of financial tools that it believes are strong enough to stem a financial panic if matters worsen.
The government is “still going to provide a guarantee” for much of Evergrande’s activities, said Zhu Ning, deputy dean of the Shanghai Advanced Institute of Finance, “but the investors are going to have to sweat.”
The authorities have other ways to quell public unease about Evergrande. For months, local governments have been issuing directives urging Communist Party officials and companies to watch budding protests related to China’s troubled property developers. Some notices warn officials to monitor aggrieved home buyers, unpaid contractors, and even laid-off real estate salespeople.
Follow the demand to spot them early, defuse early, control before and deal with earlier,” the housing department of Lingshan County in southern China said in a directive about possible protests earlier this year. “The heads of property development firms must personally take in hand the work of dealing with petitions and maintaining stability.”
Censorship of the press and social media makes it hard for the general public to know about the extent of Evergrande’s troubles and for Evergrande home buyers and investors to organize.
“The government can place them under watch and pressure them through their employers or relatives not to make trouble,” said Minxin Pei, a professor of government at Claremont McKenna College who is writing a study of China’s domestic security apparatus.
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China has a lot riding on its ability to contain the fallout from an Evergrande collapse. After Xi Jinping, China’s most powerful leader in generations, began his second term in 2017, and he identified reining in financial risk as one of the “great battles” for his administration. As he approaches a likely third term in power that would start next year, it could be politically damaging if his government mismanaged Evergrande.
But China’s problem may be that it controls financial panics too well. Economists inside and outside the country argue that its safeguards have coddled Chinese investors, leaving them too willing to lend money to large companies with weak prospects for repaying it. Over the longer term, though, China’s more significant risk may be that it follows in the footsteps of Japan, which saw years of economic stagnation under the weight of enormous debt and slow, unproductive companies.
By not forcefully signaling an Evergrande bailout, the Chinese government is essentially trying to force both investors and Chinese companies to stop channeling money to risky, heavily indebted companies. Yet, that approach carries risks, especially if a disorderly collapse upsets China’s legions of home buyers or unnerves potential investors in the property market.
An abrupt default by Evergrande on a wide range of debts “would be a useful catalyst for market discipline, but could also sour both domestic and foreign investor sentiment,” said Eswar Prasad, an economics professor at Cornell University. The latter is a former head of the China division at the International Monetary Fund.
Some global investors worry that Evergrande’s problems represent a “Lehman moment,” a reference to the 2008 collapse of the Lehman Brothers investment bank, which heralded the global financial crisis. Evergrande’s failure, they warn, could expose other debt problems in China and hit foreign investors, who hold considerable amounts of Evergrande debt, and other property developers in the country.
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