China is warning local governments to prepare for "a possible storm" if property giant Evergrande defaults.
Evergrande, the second-largest property developer in China, is on the brink of collapse and struggling under the weight of $300 billion in debt. China is signaling reluctance to bail out the company, which some economists fear could present a threat to the global economy.
Chinese authorities are now asking local governments to prepare for Evergrande’s failure, officials familiar with the discussions told the Wall Street Journal. The officials described the actions as “getting ready for the possible storm.” Chinese-owned enterprises and local governments have been directed to step in only at the last minute should Evergrande be unable to handle its obligations.
The news comes just days after Evergrande, which holds 6.5% of China’s total property sector debt, warned investors that if it can’t raise capital quickly, it may default on its obligations. Evergrande was supposed to repay interest on some loans Monday. Officials in China have told the major banks they won’t be paid.
Chinese officials have directed local governments to prepare groups of lawyers and accountants to wade through Evergrande’s operations in their regions. Local governments have also been tasked with setting up law enforcement teams in the event of protests sparked by public outrage and been told to tell property developers to be ready to take control of real estate projects.
The fallout from Evergrande's looming failure could affect the entire economy given how large the company is. Evergrande owes money to more than 170 Chinese banks and 121 other financial firms.
Some experts believe that a wholesale bailout by Beijing is not expected, as it would undermine China’s goal of getting the property sector to act with greater financial discipline, although analysts think the government will try to assist the company through guidance with debt restructuring or bankruptcy.
China is expected to help facilitate funding and negotiations to ensure home buyers and small investors are insulated from the fallout of Evergrande’s downfall “as much as possible,” S&P Global Ratings analysts said in a report this week.
While some economists have feared a Lehman Brothers-like collapse that could send global markets into a tailspin, analysts think that if other large property developers start collapsing in the wake of Evergrande’s failure, the Chinese government would intervene directly, rendering global fallout “manageable.”
In a positive sign, Evergrande’s stock, which has plunged about 80% over the past six months, was up on Thursday after the firm reached an agreement with bondholders to pay interest on yuan bonds due. The company is also set to pay $83.5 billion in interest this week, although it is unclear if it will follow through on that commitment.
Still, there are concerns that if Evergrande falls, it could result in a credit crunch, as banks may be forced to lend less.
“The repercussions from Evergrande’s prospective collapse will likely contribute to China's ongoing economic deceleration, which in turn anchors global growth and inflation and casts a pall over commodity prices,” said Phoenix Kalen, a strategist at Societe Generale in London.
While the Dow had one of its worst days this year and shed more than 600 points on Monday, partially due to Evergrande jitters, U.S. markets, fueled by optimism with the Federal Reserve, rebounded this week and were in the green on Thursday.
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Original Author: Zachary Halaschak