Why the West, and Not China, Fears Evergrande Default

Sept. 20, 2021 (EIRNS)—The following item is appearing in the n. 38 of the EIR Strategic Alert Service.

The largest Chinese real estate company, Evergrande, is a few days away from a default, but Beijing is not worried. Instead, Western financial circles are fearing a chain-reaction and are scrambling to obtain a bailout of sorts. However, the Chinese authorities have already announced that no bailout is coming. Global Times Editor-in-Chief Hu Xijin said on his WeChat social media account on Sept. 16 that Evergrande should turn to the market for salvation, not the government. The irony is that whereas neo-liberal systems in the West have abused state interventionism to bail out banks and hedge funds in the last decade, an ostensibly communist regime lets “market mechanisms” decide on Evergrande’s destiny.

The reason is simple: Financial bubbles can grow and burst in China, like this one in the real estate sector, but the commercial banking system is insulated from speculation, thanks to a bank separation regime. Evergrande is basically an offshore operation; its holding is based in the Cayman islands and it has 16% of the entire Chinese bond exposure, at junk-interest rates that go up to 14%. Its default hits mostly foreign creditors, including the Gotha of Western investment funds, which turned to Chinese junk bonds as interest rates on the U.S. junk market have gone negative, reflecting the Fed QE policy. The four largest creditors are the Ashmore Group (U.K.) with $430 million exposure; BlackRock with almost $400 million; UBS with $280 million and HSBC with little more than $200 million.

That is why, the same day as Joe Biden announced the new geopolitical alliance with the U.K. and Australia, the Wall Street elite were having a closed-door meeting with the vice-chairman of the China Securities Regulatory Commission Fang Xinghai. The managers of Goldman Sachs, Citadel and other Wall Street bigs had a three-hour discussion with Fang, to understand how far the government wants to go with the state “correction” of the Chinese economy, Reuters reports.

The Evergrande case is a litmus test whether China follows the corrupt Western policy of “too big to fail” or if they will put their money where their mouth is, and let the rotten apple fall. Indications are that Evergrande will default on the $83.5 million interest due on Sept. 23 and on the $47.5 million due on Sept. 29. At the same time, the Chinese central bank has injected CN¥90 billion between Sept. 16-17 to protect the overnight repo market and is offering small Chinese investors compensations from bond losses in the form of flats and other facilities.