Evergrande The ‘Controllable’ Demolition

Beijing is aware of the problem.

Thankfully, it’s “controllable.”

That’s the word the PBoC used Friday to describe Evergrande. With missed payments piling up, the central bank’s silence on the beleaguered developer at the center of China’s burgeoning property meltdown had become deafening.

Earlier this week, some holders of two Evergrande dollar bonds with coupons due said they hadn’t received funds. The company missed loan payments last month and markets chafed at the ambiguous wording of a statement related to interest payments due on a yuan-denominated obligation. A few days after that, on September 24, an $83.5 million coupon payment on a dollar-bond came due.

Although market participants would like to believe the situation can be ring-fenced, the combination of Beijing’s property crackdown and souring sentiment tied in part to Evergrande’s slow-motion implosion is spilling over. Just ask Fantasia.

Offshore defaults have already exceeded Goldman’s projection for all of 2021 (figure below), and depending on what happens with Evergrande and Sinic, which said it too may default, the situation could get markedly worse.

The PBoC on Friday said “market-oriented and rule-of-law principles,” are being employed at the local government level to defuse the Evergrande bomb. The Jumbo Fortune story suggests some land mines may be buried, though.

You wouldn’t want to be an Evergrande executive right now, that’s for sure. At Friday’s press briefing, a PBoC official said the company “failed to manage its business well and to operate prudently amid changing market conditions.”

The official, Zou Lan, described a “blind” pursuit of expansion. At the risk of lapsing into the macabre, the Party isn’t known to be forgiving when recklessness on the part of individuals or companies creates systemic hazard or otherwise threatens domestic stability.

Zou said that while some developers face credit issues, that’s “a normal market phenomenon.” Additionally, the PBoC suggested “some banks” may have misconstrued macroprudential policy shifts vis-à-vis the property sector.

Apropos, Beijing instructed banks to speed approvals for home loans for the remainder of the year, in an apparent bid to offset spillover from property curbs. “Financial regulators told some major banks late last month to accelerate approval of mortgages in the last quarter,” Bloomberg reported, citing sources who also said lenders “were permitted to apply to sell securities backed by residential mortgages to free up loan quotas, easing a ban imposed early this year.”

Meanwhile, Xi reiterated that China will continue to improve housing supply and will be steadfast in the contention that housing is for living in, not speculation. His remarks came in an article published by Qiushi magazine.

China needs to create avenues for upward mobility so that more people can get rich, Xi went on to muse, adding that he will “firmly oppose the disorderly expansion of capital and improve antitrust regulation.”

Common prosperity, he said, is a long-term process. It’ll take time to achieve, and it “can’t be rushed.”