{"id":137461,"date":"2021-09-01T13:03:02","date_gmt":"2021-09-01T13:03:02","guid":{"rendered":"https:\/\/precoinnews.com\/?p=137461"},"modified":"2021-09-01T13:03:02","modified_gmt":"2021-09-01T13:03:02","slug":"china-is-grappling-with-a-devils-bargain","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/markets\/china-is-grappling-with-a-devils-bargain\/","title":{"rendered":"China is grappling with a \u2018devil\u2019s bargain\u2019"},"content":{"rendered":"

The debt-riddled underbelly of some of China\u2019s bigger companies perhaps provides another layer of insight into Xi Jinping\u2019s abrupt imposition of a new and aggressive approach to \u201ccommon prosperity\u201d on the country\u2019s biggest enterprises.<\/p>\n

For decades it was the entrepreneurs who helped turbocharge China\u2019s growth rate, particularly during the ultra-high growth in the decade after the financial crisis where Chinese companies gorged on the torrents of liquidity, the access to cheap debt and the stimulus China poured into its domestic system and economy.<\/p>\n

<\/p>\n

Billionaire Hui Ka Yan is the chairman of one of China\u2019s biggest property developers, Evergrande, which is faltering.<\/span>Credit:<\/span>Bloomberg<\/cite><\/p>\n

For a variety of reasons, not the least of which was the flaunting of wealth and perceived power and independence from the state of tech entrepreneurs like Alibaba\u2019s Jack Ma, China\u2019s authorities launched an assault on the big tech companies this year and pressured their billionaire founders to \u201cdonate\u201d towards its goal of common prosperity.<\/p>\n

That heralded a radical shift, the biggest in 40 years, from an emphasis on creating wealth towards redistributing it.<\/p>\n

Before COVID the authorities had been attempting to drain leverage from their financial system and corporate sector \u2013 particularly the property sector \u2013 an effort that was put on hold while they responded to the pandemic with fiscal and monetary stimulus. Until the Delta strain emerged this year they had been resuming that effort.<\/p>\n

This year it has become clearer why the authorities were so focused on deleveraging as the dire financial condition of some of China\u2019s biggest enterprises has been revealed.<\/p>\n

HNA, the sprawling conglomerate that was once one of the world\u2019s largest asset buyers (and a former shareholder in Virgin Australia) collapsed into bankruptcy with debts of more than $100 billion at the start of this year after several years of attempts to unwind its debt-fuelled global spending spree. It was placed in state hands last year.<\/p>\n

Huarong, set up by the state to manage bad debts within China\u2019s banking system after the Asian financial crisis in the late 1990s, is in the process of being bailed out now by state-owned enterprises after losing about $22 billion last year.<\/p>\n

It has about $330 billion of liabilities and, along with the bad debts it was supposed to manage, a disparate collection of businesses and other assets it had acquired in a spending spree well beyond its original mandate. Its chairman, and the architect of its expansion, was found guilty of corruption and executed in January.<\/p>\n

There have also been a string of other defaults and threatened defaults among Chinese state-owned and private entities over the past year or so \u2013 yields of China\u2019s offshore high-yield bonds have been trading at double-digit levels \u2013 but the other \u201cwhale\u201d in trouble is one of China\u2019s biggest property developers, China Evergrande.<\/p>\n

With most of China\u2019s house wealth tied up in property and Evergrande one of the country\u2019s largest developers its struggles are of national significance and concern. It has been engaged in a firesale of assets that has reduced its debt load from a peak of about $180 billion last year to about $120 billion but it has total liabilities \u2013 including trade creditors \u2013 of more than three times that amount.<\/p>\n

HNA, Huarong and Evergrande are almost certainly the tip of an iceberg, with the continuing attempts by Beijing to deleverage and restructure its largest enterprises an indication of the perceived\/real fragility and vulnerability of the corporate sector.<\/p>\n

Its warning that it might default on its debt on Tuesday sent shudders through offshore bond markets \u2013 its bonds are trading at less than 40 cents in the dollar \u2013 where the company has been China\u2019s biggest issuer of junk bonds. More than 40 per cent of its debts fall due within the next 12 months.<\/p>\n

The authorities wouldn\u2019t have been taken by surprise. They directed property developers to reduce their leverage and stop issuing new debt last year and called in Evergrande last month to put pressure on the company to stabilised its finances without destabilising financial and property markets.<\/p>\n

There has been speculation of a state-led bailout of Evergrande \u2013 which underscores its significance within China.<\/p>\n

<\/p>\n

This year it has become clearer why the authorities were so focused on deleveraging as the dire financial condition of some of China\u2019s biggest enterprises has been revealed.<\/span>Credit:<\/span>Bloomberg<\/cite><\/p>\n

Despite the interventions in Huarong (where the majority shareholder, the Ministry of Finance, made it almost inevitable) and HNA \u2013 the authorities would, however, be reluctant to bail out yet another over-extended group and add to the moral hazard already pervasive in an economy so state-dominated.<\/p>\n

HNA, Huarong and Evergrande are almost certainly the tip of an iceberg, with the continuing attempts by Beijing to deleverage and restructure its largest enterprises an indication of the perceived\/real fragility and vulnerability of the corporate sector.<\/p>\n

The examples of threatening corporate recklessness and ill-discipline, along with the hubris and conspicuous wealth and prospective power of the billionaire tech entrepreneurs \u2013 China has more billionaires than any other country \u2013 would almost certainly have unsettled the authorities and have contributed to the crackdown on the big tech companies and the shift in broad national strategy from creating wealth with an expectation that it would trickle down to redistributing it.<\/p>\n

In the West there is a phrase that encapsulates the dilemma confronting the Chinese authorities in dealing with the likes of HNA, Huarong and Evergrande and which fits neatly with the new emphasis on common prosperity.<\/p>\n

\u201cPrivatise the profits, socialise the losses\u201d is essentially the devil\u2019s bargain the most indebted of China\u2019s big companies have presented Beijing. That\u2019s a difficult enough proposition to swallow in a free market economy. It\u2019s a near-impossible one within a communist one, even one with a model of \u201csocialism with Chinese characteristics.\u201d<\/p>\n

It would seem the authorities have redefined the model, adding a lot more socialism and reducing the \u201cChinese characteristics.\u201d<\/p>\n

The Market Recap newsletter is a wrap of the day\u2019s trading. <\/i><\/b>Get it each we<\/i><\/b>e<\/i><\/b>kday afternoon<\/i><\/b>.<\/i><\/b><\/p>\n

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The debt-riddled underbelly of some of China\u2019s<\/p>\n","protected":false},"author":3,"featured_media":137460,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23054],"tags":[],"yoast_head":"\nChina is grappling with a \u2018devil\u2019s bargain\u2019 - Pre Coin News<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/precoinnews.com\/markets\/china-is-grappling-with-a-devils-bargain\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"China is grappling with a \u2018devil\u2019s bargain\u2019 - Pre Coin News\" \/>\n<meta property=\"og:description\" content=\"The debt-riddled underbelly of some of China\u2019s\" \/>\n<meta property=\"og:url\" content=\"https:\/\/precoinnews.com\/markets\/china-is-grappling-with-a-devils-bargain\/\" \/>\n<meta property=\"og:site_name\" content=\"Pre Coin News\" \/>\n<meta property=\"article:published_time\" content=\"2021-09-01T13:03:02+00:00\" \/>\n<meta name=\"author\" content=\"mediabest\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:image\" content=\"https:\/\/precoinnews.com\/wp-content\/uploads\/2021\/09\/China-is-grappling-with-a-\u2018devils-bargain.jpg\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"mediabest\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/precoinnews.com\/markets\/china-is-grappling-with-a-devils-bargain\/\",\"url\":\"https:\/\/precoinnews.com\/markets\/china-is-grappling-with-a-devils-bargain\/\",\"name\":\"China is grappling with a \u2018devil\u2019s bargain\u2019 - 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