If something looks too good to be true, it usually is. When a company acts irrationally, cagey investors have learned to ask why.
Take the example of Evergrande, which has endured a turbulent past few days.
The real-estate group is a whopper, with Rmb2.3 trillion ($337 billion) in assets. It is also highly leveraged, with debts of $122 billion at the end of June.
About a week ago, a letter emerged, purportedly sent by the firm to the government of Guangdong. In it, Evergrande said it faced a cash crunch unless it was allowed to complete a backdoor listing on Shenzhen’s main bourse by January.
Rue the outcome
Evergrande fumed, calling the letter “fabricated”, but the message it contained could not, if you are an investor or a regulator, have been clearer or less veiled.
It warned that letting a firm of its size default on its debt embodied the kind of risk China usually abhors. It openly pondered the bankruptcy of thousands of related businesses and the loss of more than three million jobs.
Whether by default or by design, the message was clear: let the Shenzhen listing happen and help us survive or rue the outcome.
Investors took note, with many dumping its Hong Kong stock and dollar bonds.
Beijing’s message is clear – nothing and no one is bigger than the system
But so far at least, Beijing has remained resolute. A month ago, it unveiled a ‘three red lines’ policy to rein in excessive borrowing by property firms. Evergrande crossed each of those lines a long time ago.
The Xi administration seems to have made a calculated decision about the company, seeing it as big – but not ‘too big to fail’.
If Evergrande is in dire financial straits, central government will surely need to offer some kind of rescue package. A default will unsettle the banking sector and rattle the property market, not to mention local and foreign holders of its bonds.
But it will not, it seems, be bailed out at any cost.
Beijing has in recent years shown a steely willingness to let corporate and financial institutions that do not pose a systemic risk to the system, or to social cohesion, fail – particularly if they brought ruin on themselves.
Let them fail
Regulators have carefully and with a surprising lack of fuss let some of the country’s brasher and more leveraged conglomerates fail.
The list includes Anbang, which applied in September to be wound up, after one of history’s more eclectic M&A sprees; and Tomorrow Group, which at its peak owned stakes in 44 financial institutions, including the now-defunct Baoshang Bank.
Evergrande cannot be lumped in with either of those two firms, but analysts have long fretted about its rising stock of debt, cash flow and balance sheet. It is one of the myriad firms that sprang up in the 1990s to meet the needs of a wealthy and more urbanized populace, only to borrow beyond its means.
Evergrande may not just survive but emerge better, leaner and less bloated. Unlike Anbang or Tomorrow, it has real assets: huge land banks it can carve out and sell to rivals.
Beijing is betting that, if push comes to shove, Evergrande will do so.
It is also sending a clear message – that nothing and no one is bigger than the system.
