Will China Bail Out Evergrande?

Welcome to Foreign Policy’s China Brief.

The highlights this week: Real estate giant Evergrande faces a massive debt deadline, Beijing’s AUKUS response is more muted than expected, and two activists disappear in Guangzhou.

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China’s Evergrande Group, the crisis-ridden real estate giant, managed to make a $36 million payment on its debts due on Wednesday through negotiations, but it is still likely to miss another $83.5 million interest payment due the same day. The company appears to be doomed. The question that remains is how much of the Chinese economy it will take down with it, and whether its fate is a symptom of much bigger problems.

It’s still possible the Chinese government may offer a bailout to Evergrande, but there is considerable uncertainty among regulators about how to handle the company. Protesters have already gathered near the Evergrande offices demanding the government compensate investors and apartment owners. If the government prevents a major financial failure to avoid political unrest, it risks moral hazard—signaling to other developers that a “guaranteed bubble” still protects them.

At a time when authorities are trying to curb the real estate sector to reduce risk and make housing more affordable, keeping Evergrande afloat may worsen the problems. But letting the company fail risks an immediate crisis. Property and services account for 29 percent of China’s GDP—about the same as Ireland and Spain before their own bubble-induced crises—and the problems go far beyond Evergrande. China’s housing prices have started dropping sharply, and many other property developers face financial distress because they took on debt to expand amid what seemed to be an endless boom.

Michael Pettis, an expert in Chinese debt, wrote an excellent summary of the problems the regulators face this week. But I would argue the odds still slightly favor the authorities hoping to kick the can down the road rather than allow Evergrande to collapse. Chinese officials are risk-averse, especially in politically tense times. An Evergrande implosion could have consequences that would require scapegoats. Unless they’re getting direct orders from the top telling them otherwise, regulators will default to not defaulting. That would avoid a hard landing for the Chinese economy.

Even if Evergrande doesn’t collapse, shockwaves are already hitting the economy. With global markets down, Chinese property sales across the country are also dropping. Land sales, which make up one-third of local government financing, were down by 90 percent in the first 12 days of September compared to the same time last year. The central government has tried to make up those financing gaps, but the loss of income could still cause local governments to miss their payments, with a domino effect for other obligations.

In retrospect, it’s remarkable that Evergrande was allowed to grow to the size it did and that Chinese and foreign investors came along for the ride. China’s real estate and debt boom has been a mess for well over a decade—yet Evergrande’s spree only really started in 2016. It was valued at around $40 billion as recently as this January. (Its value is now down to less than $4 billion.)

Beyond Evergrande’s malign effects on the rest of the economy, the ongoing crisis has a much more direct impact for the 1.6 million people waiting for long-delayed and already paid for apartments from the company as well as the more than 80,000 people who purchased Evergrande’s retail finance products. That includes thousands of Evergrande employees who were strong-armed by the company into investing or losing their bonuses.

Even if the government allows the company to collapse, expect measures to compensate these apartment buyers first. Property is the bedrock of the Chinese urban middle class and of their support for the government. Investors may be less lucky.

 Muted AUKUS response. China has expressed less anger over the nuclear-powered submarine deal between Australia, the United Kingdom, and the United States than some observers might have been expected. Although there has been some editorializing and even an oblique threat that Australia might be a target for Chinese nuclear weapons, the Chinese response has paled in comparison to France’s rage over the deal—or to furious reactions to Australian or U.S. moves in the past.

That may be in part because France thought it had a good working relationship with the United States and Australia, whereas relations between Washington or Canberra and Beijing were already at a nadir. It’s also possible that the Mid-Autumn Festival holiday from Sept. 19 to 21 meant Chinese officials had less time to react, and the rage machine will get going again in the next few days.

Activists disappeared. Feminist activist Sophia Huang and labor activist Wang Jianbing have disappeared, almost certainly detained by Chinese authorities in Guangzhou, China, on Sept. 19. Huang became prominent for her work with the #MeToo movement while Wang specialized in occupational hazards for workers. The two activists closely collaborated on many projects.

Activists disappear frequently in China, but this case may end up being particularly high profile and add to diplomatic squabbles with the United Kingdom. Huang was awarded a Chevening Scholarship to study in the country and was due to leave on Sept. 20.

The world’s worst three-day weekend. China just held a three-day weekend for the Mid-Autumn Festival, a lunar celebration characterized by lanterns and mooncakes. The weekend lasted from Sunday to Tuesday. That’s because to get Monday and Tuesday off, everyone was mandated to work Saturday. In China, only a certain number of days are actually officially allocated time off—even for national holidays. Other days have to be made up by working extra days.

So people worked a six-day week last week to get a “three-day weekend.” Similarly, the weeklong National Day holiday in October will see workers in the office for six-day weeks before and afterward. Most people strongly dislike this system, but it’s characteristic of the quota-driven mentality that pervades work life.

 Xi pledges no new overseas coal. In his United Nations General Assembly speech on Tuesday, Chinese President Xi Jinping promised China would not construct any new overseas coal plants. That’s a big deal because China was virtually the only remaining source of foreign funding for coal projects. But “new” is the key word: There are a lot of existing Chinese-funded projects that are going ahead. The next few months will reveal if those are suspended or not.

China’s domestic coal use is still huge, and 43 new coal-fired plants were announced in the first half of this year alone. The existing plan is for coal use to peak in 2025, a few years before China’s current target of cutting emissions. Xi’s visit to a coal power plant last week signaled potential new restrictions on the sector, although messaging is mixed. China is the world’s biggest emitter by some distance, producing twice as much as the United States. (Its emissions are less than half as much per capita though.)

China fears rising seas and devastating storms as much as any other country, but the coronavirus pandemic threw a wrench in its climate efforts. When the economy is weak, local governments often loosen green targets to keep factories running and GDP up while the central government pours money into heavy industry.

Internet walls break. In a victory for consumers amid Beijing’s regulatory push, Chinese technology firms have been ordered to remove their content-sharing limits. Previously, it was often impossible to share links to a company’s products on a site owned by its competitors, such as sharing a Douyin video link on messaging app WeChat. (The first app is owned by Alibaba and the second by Tencent.) The issue also limited payment methods.

Unlike other regulatory moves, this one won’t significantly affect tech stocks. Instead, it will likely please consumers and boost business—important at a time when China’s top two tech firms have lost $330 billion in value in the last nine months.

Screen time capped. Following new restrictions on online gaming, other products have rushed to introduce caps on the amount of time young people can spend on them, hoping to appease regulators before they strike. So far, these policies are more sensible than the draconian limits on video games for minors. Video app Douyin, for example, has capped time for those under the age of 14 to 40 minutes per day and pledged that algorithms will prioritize wholesome content, such as museum tours and math lessons. Expect a certain amount of “Xi Jinping thought” too.