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Beijing’s silence on Evergrande is spooking global markets

September 21, 2021, 12:05 PM UTC

Greetings from Shanghai, where I’ll be hunkered down in hotel quarantine for the next two weeks in preparation for Fortune’s October 19 Global 500 Summit in Hangzhou.

Stock exchanges on China’s mainland were closed Tuesday for the Mid-Autumn Festival holiday. But in the rest of Asia, the prospect of a default by China Evergrande Group roiled share prices again today, as investors waited—in vain—for Beijing to signal its willingness (or unwillingness) to aid the embattled property developer to head off a broader financial crisis.

As Fortune‘s Grady McGregor reported from Hong Kong yesterday, the emerging consensus among global investors seems to be that, while Chinese regulators don’t favor a full-scale bailout for Evergrande, the nation’s second-largest property firm, they are determined to prevent Evergrande from becoming ‘China’s Lehman Brothers.’

In recent days a chorus of overseas experts has come forward with reassurances that Beijing is readying a financial restructuring plan—some are calling it a “managed default”—to cushion the blow of an Evergrande collapse. The goal of such an intervention would be to minimize collateral damage to other Chinese property companies, avoid popping the speculative bubble in China’s domestic housing market, and ward off the nightmare scenario that an Evergrande failure might create a “contagion” that infects the entire global financial system.

As Bloomberg‘s John Authers argues in this analysis, the consequences of Evergrande going belly up are less likely to resemble the aftermath of Lehman Brothers—whose spectacular 2008 implosion triggered a systemic financial upheaval—than the quiet disposal of Long Term Capital Management, the Connecticut-based hedge fund the Federal Reserve forced creditors to sort out after it blew up in 1998.

Among investors on Wall Street and Hong Kong, conventional wisdom has it that, should Chinese regulators allow Evergrande to go bust, they will move to protect domestic customers who bought homes from the company, as well as small investors, construction vendors, and possibly Evergrande employees.

As Fortune‘s Yvonne Lau explains here, many analysts warn that large investors, particularly those from overseas, won’t be so lucky. Some say Evergrande’s shareholders face a total loss of their investments in the company, while banks and bond-holders—among them funds managed by Ashmore Group, BlackRock, and Pacific Investment Management Co.—could recoup only pennies on the dollar.

But the good news, optimists aver, is that China’s authoritarian political system enables swift and decisive action.

That may be. But if Chinese officials have a plan for dealing with Evergrande’s predicament, so far they’re not talking about it—even as the cash-strapped property giant hurtles towards a make-or-break Thursday payment deadline. Granted, China’s on holiday. But there has been scarcely any mention of Evergrande in the state-owned press. And the silence is starting to rattle investors.

In Hong Kong today, Evergrande’s shares sank 7%, following a 10% decline Monday. The company stock has lost 85% of its value so far this year. In recent days, worries about Evergrande’s travails have battered the share prices of other deeply indebted mainland developers, including China Vanke, Country Garden Holdings, and Sunac, as well as Hong Kong property companies such as Henderson Land, Sun Hung Kai Properties, New World Development, and weighed down those of Evergrande’s major creditors, including Minsheng Bank, Everbright Bank and Ping An Bank, a subsidiary of the Ping An Insurance Group.

Even Japan’s Topix sank 2% today on Evergrande concerns. According to Reuters, one of the companies dragging the index down was Toto, the giant Japanese toilet maker, who counts Evergrande as a major customer and depends on the China market for 30% of its profit. Toto’s shares sank 6% today. Other Japanese losers included Daikin, a major manufacturer of air-conditioners, Nippon Paint, and earth-moving equipment manufacturer Komatsu.

China’s regulators now grapple with the classic “moral hazard” dilemma. Their challenge is to figure out how to calm all these complicated global financial ripples and tamp down social unrest—but do it in a way that doesn’t seem to reward reckless lending and speculative investment. Evergrande’s swashbuckling founder Hui Ka Yan was the poster boy for behavior of that latter sort. Fortune‘s Eamon Barrett explains here how Hui plowed the early profits from the property business he founded in 1996 into ever-riskier ventures in electric vehicle manufacturing, bottled mineral water, football clubs, and amusement parks—piling up a $300 billion debt mountain that seems about to come crashing down.

Hui, for his part, is putting on a brave face. In a letter to staff, reported Tuesday in China’s Securities Times, he promised Evergrande will soon step out of its “darkest moment” to resume and accelerate construction that has been suspended on its many properties.

If you will be in China on Oct. 19 and are interested in attending the Fortune Global 500 Summit, drop me a note. It’s by invitation only, but we give special consideration to Eastworld subscribers!

More Eastworld news below.

Clay Chandler
clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Grady McGregor. Reach him at grady.mcgregor@fortune.com

Eastworld news

Doing business

Last week, the World Bank said it would cancel its Doing Business series on country business climates after an independent probe found that senior leaders including current Monetary Fund Chief Kristalina Georgieva pressured staff to manipulate the data in favor of China. On Monday, the World Bank published a review conducted by senior economists on its website, which cited “a pattern of government efforts to interfere” with the rankings and World Bank pledged to find new ways to help governments improve their business climates. Reuters 

Vaccine hopes

On Monday, India’s health minister Mansukh Mandaviya said India would resume exports of COVID-19 vaccines starting next month. India had planned to be the largest contributor to COVAX, the United Nations-backed scheme to share vaccines, but halted exports in April amid a devastating wave of COVID-19. Mandaviya said India would produce over 1 billion doses in the final three months of this year, but did not specify how many of those doses would be exported abroad. New York Times

Rewriting rules

Chinese President Xi Jinping believes that private capital has run amok and is attempting to return the country to a more socialist vision in line with China’s founder Mao Zedong, Chinese officials tell the Wall Street Journal. Xi is not attempting to eliminate market forces entirely, but rather is attempting to exercise more government control over the economy and set stricter parameters for entrepreneurs and investors to make money. Xi’s actions to rein in tech and other large firms suggest that he is effectively rewriting the rules for doing business in the world’s second-largest economy. Wall Street Journal

Crypto crackdown

New rules in South Korea will likely force the majority of the country’s cryptocurrency exchanges to close by Friday. South Korea’s financial watchdog will require all exchanges to obtain licenses from Internet and financial regulators to continue operating by Sept. 24, a demand that only 28 of 63 crypto exchanges have met so far. Some observers welcome the new regulations as lending legitimacy to the industry, while others say they could create monopolies. Fortune

A new Gulf

In the past ten years, oil exports from countries like the United Arab Emirates and Saudi Arabia have slowed to the U.S. amid a shale boom of American oil, while exports to China have skyrocketed, making Beijing the biggest buyer of crude oil in the Gulf. Beijing’s increasingly close economic ties to the region are now pushing current and future leaders to rely increasingly on China instead of the U.S. as they plan to build out smart cities and make new investments in infrastructure and health care. Financial Times

Markets and movers

SINIC – The Chinese property developer halted trading after its share price dropped 87% in Hong Kong on Monday afternoon amid concerns that it may share similar liquidity issues as property giant Evergrande. The firm's stock has not resumed trading as of Tuesday.

Didi Chuxing – Co-founder Jean Liu of the embattled Chinese ride hailing giant reportedly has told some close associates that she intends to step down from her role as president of the firm amid intense regulatory scrutiny from China’s government. Didi denied the Reuters report, saying it was “untrue and unsubstantiated.”

Universal Studios – On Monday, Beijing celebrated the grand opening of a new Universal Studios theme park, with throngs of crowds packing into the sold-out park for a chance to enjoy new Harry Potter and Jurassic World themed rides. Chinese media outlets have noted that the successful park opening is a sign that business and cultural connections remain strong between China and the U.S. despite recent tensions.

Bamboo Airways – The Vietnamese airliner is buying engines from General Electric for $2 billion to outfit its new Boeing airplanes, Bamboo Airways Chief Executive Officer Dang Tat Thang announced Tuesday. Launched in 2019, Bamboo Airways aims to connect tourists to Vietnam and hopes to start flights to the U.S. next year.

Traveloka – The Indonesian online travel unicorn is exploring a traditional U.S. IPO next year, weeks after talks fell through with the Peter Thiel-backed Bridgetown Holdings Ltd. to debut in the U.S. via a SPAC merger. Traveloka had been valued as high as $5 billion this year in the now scuttled plans to debut via the SPAC.

China EVs – Chinese consumers bought 1.79 million electric vehicles in the first eight months of 2021, nearly 200% more than they bought in the same period last year. Amid the surge in sales, William Li, chief executive of New York-listed EV maker Nio, said that the industry should be able to meet the government's goal of having EVs account for 20% of total sales next year, three years ahead of target.

Japanese cars – Customers of Japanese car makers Honda and Toyota are reporting year-long waits for new vehicles as both firms face production cuts amid a global shortage in chip supplies. 

Malaysia – Malaysia's Securities Commission announced on Tuesday that it will review its framework for SPACs amid growing demand for the deals that offer a cheaper and faster route to market than traditional IPOs.

 

Final figure

$12 trillion

China, Japan, and South Korea will spend an estimated $12 trillion in their transport sectors to reach net-zero carbon emissions, Dutch bank ING says in a new report. China recently pledged that it will be net zero by 2060, while Japan and South Korea are aiming for 2050. The three countries currently account for two-thirds of all carbon dioxide emissions in Asia-Pacific and approximately a third of global emissions. But the hefty price tag, which includes spending on items like electricity generation capacity for electric vehicles but not on infrastructure like charging stations, suggests that it will be costly for each of the countries to meet their commitments.

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