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Evergrande Is Face Of Zombies Stalking China’s Economy

It’s never a good thing when a business story pivots to yachts worthy of a James Bond villain. From the insider traders of the 1980s to Russian oligarchs of the 1990s to Malaysian fugitive Jho Low, these seafaring metaphors of ostentatious excess make for uncomfortable headlines when the music stops.

Welcome to Hui Ka Yan’s 2021 as Chinese regulators and investors alike circle his 60-foot superyacht at a moment when his China Evergrande Group is struggling to avoid the rocks.

It’s the centerpiece of roughly $485 million of luxury assets bondholders argue Hui could sell to cover Evergrande’s debt payments. Instead, Hui has opted to delay some recent bond-coupon payments, causing some, well, choppy seas for world markets.

Hui’s yacht is named, wait for it, “Event.” What an event it’s been indeed to have China’s most indebted property developer veering toward default. And to have smaller ones, like Fantasia Holdings Group, renege on debt payments. Now, investors are fretting over Kaisa Group Holdings, which on Friday was suspended from Hong Kong trading. The developer missed recent payments on wealth products it has guaranteed.

Kaisa is in certain ways China Inc.’s patient zero. In 2016, it became the first Chinese builder to default on dollar bonds. A dubious honor no mainland company wants on their Wikipedia page. Today, it’s China’s No. 27 developer by sales, but No. 3 in dollar debt with more than $11 billion outstanding.

Now Kaisa says it’s suffering “unprecedented pressure on its liquidity” as property markets sink and credit-rating companies flag troubles in Asia’s biggest economy. And it’s a sign that the turmoil befalling Evergrande, Fantasia, Kaisa and who knows who else is a symptom of China’s troubles, not the underlying cause.

As is often the case, many observers are looking at China’s 2021 through the lens of Japan’s bad-loan crisis in the 1990s. The biggest parallel is that China’s regulators, like Japan’s 25 to 30 years ago, are treating the symptoms of excesses, not the forces behind them.

Obviously, neither China’s leaders nor Kaisa’s management internalized the big lessons from 2016. Or, for that matter, those from China’s stock-market meltdown in the summer of 2015.

The 2015 episode was the first real crisis of the Xi Jinping era, one that began in 2012. Within a few weeks between July and August 2015, Shanghai shares plunged 30%. It sent a whiff of panic around the globe with markets from Tokyo to London to New York staging powerful selloffs. Analysts buzzed about a “Minsky moment” for China as its credit-and-debt-fueled rise ends badly.

That never happens, of course. China’s financial fire brigade succeeded in putting out the blaze. As the central bank rate cuts, regulators loosened curbs on leverage, halted initial public offerings, slashed reserve requirements and suspended trading in thousands of listed companies. They went so far as allowing average folks to use apartments as collateral to buy stocks. Beijing launched a public relations campaign to characterize stock buying as a patriotic act.

The chaos passed, but the imbalances festering under the surface remain. The 2021 manifestation is a rash of default scenarios in China’s most important domestic industry. Accounting for one-third of Chinese growth, the nation’s property sector is equivalent in size to Japan’s entire $5 trillion economy.

This gets at the zombie question China skeptics have long been asking. Make that a $5 trillion question.

Some call it “Japanification,” that dreaded scenario when an economy falls and can’t get up via conventional monetary and fiscal tools. China, of course, has revived itself again and again to great effect these last 25 years. It sailed around the 1997 Asian crisis with enviable skill. It avoided the worst of the 2008 global crisis and the 2013 “taper tantrum.” It is among the first major economies to recover from the Covid-19 era. 

Yet China is still more about the quantity of growth than the quality. For all Beijing’s talk of major reform, China is still far too reliant on exports and rising property values to ensure stable or productive growth.

To be sure, Beijing’s crackdowns on Big Tech and real estate are aimed at reducing risks and excessive leverage. But too much of that focus is on the top-down, not the bottom up.

China’s real vulnerability isn’t Jack Ma’s Ant Group, Ma Huateng’s Tencent Holdings or Cheng Wei’s Didi Global. The real threat is old-economy property giants cooking up a subprime crisis with Chinese characteristics. The ones run by the superyacht set drowning in more debt than China Inc. can handle.

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