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Without government intervention China Evergrande, one of the country’s biggest property developers, will be forced into a bankruptcy reorganization.

The company used promises of above market returns to raise billions in financing from individual investors through unregulated money management products. Now protesters daily storm the company’s offices as Evergrande falls further and further behind on payments to more than 70,000 investors. Construction of unfinished properties with enough floor space to cover three-fourths of Manhattan has come to a halt and a million homebuyers are stuck having made payments to Evergrande but without homes to show from their cash.

The housing ministry told Evergrande’s main banks this week that the developer won’t be able to make interest payments due September 20.

Evergrande’s stock is down 90% from the 2020 high.

Just by itself Evergrande’s problems would be a big deal.

But Evergrande’s problems threaten to be contagious.

First, the entire real estate sector–already under pressure from the government’s efforts to damp (again) speculative buying–is reeling and the need for developers beyond Evergrande to raise cash to pay down debt is pointing toward a wave of fire sales that will further depress real estate prices. “As a systemically important developer, an Evergrande bankruptcy would cause problems for the entire property sector,” Shen Meng, director of Chanson & Co., a Beijing-based boutique investment bank, told Bloomberg. “Debt recovery efforts by creditors would lead to fire sales of assets and hit housing prices. Profit margins across the supply chain would be squeezed. It would also lead to panic selling in capital markets.”

But the contagion doesn’t stop there.

Second, once again, a crisis in the black financial markets, the home of unregulated investment products and sky-high leverage, has demonstrated just how fragile China’s financial system continues to be. The Evergrande crisis is a replay of the crisis at bad-bank China Huarong Asset Management. And before that in bad debt at conglomerate HNA Group. And before that it was regional lender Baoshang Bank.

Despite years of trying the government does not seem able to root speculation and leverage out of the financial system and the system as a whole remains dangerously exposed to a collapse if the failure one big company can’t be limited to that company by government intervention. Besides the drop in Evergrande stock, the crisis has also sent yields on China’s junk bonds to the highest level since March 2020.

Evergrande’s total liabilities come to somewhere around $300 billion. Of that 54% is secured bank and other borrowing and 17% is unsecured bank and other borrowing.

In réponse to the crisis some banks have begun hoarding yuan at the highest rate in almost four years, Bloomberg reports. That’s a sign of fear of a liquidity squeeze in the financial system.

The long-term problem that the Evergrande crisis reveals is that every time the government moves to crack down on dangerous levels of leverage or to attempt to reduce speculation in the financial markets some big Chinese company, that has built up a dangerous level of leverage, as Evergrande has, goes into crisis. And that forces the government to choose between continuing the policies that it knows the financial system needs or patching up the system one more time. Which results in a dangerous lurch from crisis to crisis. (I’m not arguing that China is alone in facing these problems or in its inability to address them.)

To date the government has not indicated whether or not it will allow a major debt restructuring or bankruptcy at Evergrande. Senior officials at state-owned banks have told Bloomberg that they’re still waiting for guidance on a long-term solution from top leaders in Beijing.

With President Xi Jinping in the midst of a potentially politically sensitive extension of his tenure in office, I think it’s unlikely that the government will roll the dice and risk a larger crisis.


Which just leaves the problems of bad debt, over leverage, and unregulated speculation to continue, until next time.