Post by Blitz on Jan 30, 2024 8:34:11 GMT -5
China Evergrande liquidation is no Lehman moment
Indebted property developer’s court-ordered liquidation could give Beijing the pivot point it needs to get serious about structural reform
By WILLIAM PESEK - JANUARY 30, 2024
asiatimes.com/2024/01/china-evergrande-liquidation-is-no-lehman-moment/
The Evergrande Center building in Shanghai is becoming emblematic of China's wider economic risks. Photo: Asia Times Files / AFP / Hector Retamal
On Monday, many investors couldn’t help but wonder if the liquidation order China Evergrande Group received from a Hong Kong court was a “Lehman moment.”
Not quite. More likely, the milestone here is of a very different nature: a move that catalyzes Beijing to get serious about ending its property crisis once and for all.
It matters that neither markets in Shanghai nor Hong Kong tanked on the news. At the same time, that hardly means Chinese leader Xi Jinping’s Communist Party is out of the woods with global investors.
Staving off a deeper selloff in mainland stocks requires bold, urgent and transparent action by Xi’s government to treat the underlying cracks in Asia’s biggest economy, not just the symptoms. In recent days, the People’s Bank of China moved to address the latter concerns. It’s lowering the reserve requirement ratio (RRR) by 50 basis points, effective February 5.
This “quite unprecedented” step should “free up around 1 trillion yuan (US$140 billion) in liquidity, which will be put toward supporting new loan growth,” says economist Carlos Casanova at Union Bancaire Privée.
The PBOC’s “haste in announcing the cut denotes urgency on behalf of policymakers, following an extraordinary rout in Chinese equities in January,” Casanova adds.
It’s far more important, though, that Xi’s team pivots immediately from prioritizing security to economic upgrades. Over the last two years, Xi’s team has ricocheted from pledge to pledge to devise a strategy to take toxic assets off property developers’ balance sheets and sharply reduce their ranks.
One possibility about which investors have long buzzed is Beijing adopting a Resolution Trust Company-like model the US used to address the savings and loan crisis of the 1980s. That could avoid a Japan-like lost decade as a sector that can generate as much as a quarter of China’s GDP gets a new lease on life.
Doing so would afford Xi’s reform team an opportunity to confound the naysayers and reinvigorate China Inc. It would make good on Xi’s pledges to prioritize the quality of growth over the quantity. And it would change the narrative of China repeating the mistakes Japan made in the 1990s amid its bad loan crisis.
Since March, Xi has entrusted the cleanup to his new premier, Li Qiang. The overarching goal has been for financial institutions to try their hand at repairing balance sheets themselves without giant public bailouts that might create fresh “moral hazards.”
Yet a lack of quantifiable progress in addressing the crisis caused trillions of dollars of capital to flee Chinese stocks in 2023. Chinese stocks have lost over $6 trillion in the last three years.
Green is down and red is up on China’s stock market ticker boards. Photo: Asia Times Files / AFP
Monday’s court ruling was handed down by Judge Linda Chan following a June 2022 lawsuit by an investor in an Evergrande unit. Repeatedly, Chan delayed proceedings to afford Evergrande time to cement a restructuring deal. In her ruling, Chan cited a “lack of progress on the part of the company putting forward a viable restructuring proposal” along with Evergrande’s “insolvency.”
Chan told a packed courtroom “I consider that it is appropriate for the court to make a winding-up order against the company, and I so order a winding-up order.”
Indebted property developer’s court-ordered liquidation could give Beijing the pivot point it needs to get serious about structural reform
By WILLIAM PESEK - JANUARY 30, 2024
asiatimes.com/2024/01/china-evergrande-liquidation-is-no-lehman-moment/
The Evergrande Center building in Shanghai is becoming emblematic of China's wider economic risks. Photo: Asia Times Files / AFP / Hector Retamal
On Monday, many investors couldn’t help but wonder if the liquidation order China Evergrande Group received from a Hong Kong court was a “Lehman moment.”
Not quite. More likely, the milestone here is of a very different nature: a move that catalyzes Beijing to get serious about ending its property crisis once and for all.
It matters that neither markets in Shanghai nor Hong Kong tanked on the news. At the same time, that hardly means Chinese leader Xi Jinping’s Communist Party is out of the woods with global investors.
Staving off a deeper selloff in mainland stocks requires bold, urgent and transparent action by Xi’s government to treat the underlying cracks in Asia’s biggest economy, not just the symptoms. In recent days, the People’s Bank of China moved to address the latter concerns. It’s lowering the reserve requirement ratio (RRR) by 50 basis points, effective February 5.
This “quite unprecedented” step should “free up around 1 trillion yuan (US$140 billion) in liquidity, which will be put toward supporting new loan growth,” says economist Carlos Casanova at Union Bancaire Privée.
The PBOC’s “haste in announcing the cut denotes urgency on behalf of policymakers, following an extraordinary rout in Chinese equities in January,” Casanova adds.
It’s far more important, though, that Xi’s team pivots immediately from prioritizing security to economic upgrades. Over the last two years, Xi’s team has ricocheted from pledge to pledge to devise a strategy to take toxic assets off property developers’ balance sheets and sharply reduce their ranks.
One possibility about which investors have long buzzed is Beijing adopting a Resolution Trust Company-like model the US used to address the savings and loan crisis of the 1980s. That could avoid a Japan-like lost decade as a sector that can generate as much as a quarter of China’s GDP gets a new lease on life.
Doing so would afford Xi’s reform team an opportunity to confound the naysayers and reinvigorate China Inc. It would make good on Xi’s pledges to prioritize the quality of growth over the quantity. And it would change the narrative of China repeating the mistakes Japan made in the 1990s amid its bad loan crisis.
Since March, Xi has entrusted the cleanup to his new premier, Li Qiang. The overarching goal has been for financial institutions to try their hand at repairing balance sheets themselves without giant public bailouts that might create fresh “moral hazards.”
Yet a lack of quantifiable progress in addressing the crisis caused trillions of dollars of capital to flee Chinese stocks in 2023. Chinese stocks have lost over $6 trillion in the last three years.
Green is down and red is up on China’s stock market ticker boards. Photo: Asia Times Files / AFP
Monday’s court ruling was handed down by Judge Linda Chan following a June 2022 lawsuit by an investor in an Evergrande unit. Repeatedly, Chan delayed proceedings to afford Evergrande time to cement a restructuring deal. In her ruling, Chan cited a “lack of progress on the part of the company putting forward a viable restructuring proposal” along with Evergrande’s “insolvency.”
Chan told a packed courtroom “I consider that it is appropriate for the court to make a winding-up order against the company, and I so order a winding-up order.”