China Evergrande Never Got Auditor Warning Despite Big Debt Load

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The Wall Street Journal 24 September, 2021 - 04:30am 19 views

How much is evergrande in debt?

Now, Evergrande is teetering on the edge of financial collapse, weighed down by an $88.5 billion debt burden and total liabilities in excess of $300 billion. The company has hired financial advisers, pointing to a likely restructuring, and Beijing is telling local officials to prepare for its potential downfall. The Wall Street JournalChina Evergrande Never Got Auditor Warning Despite Big Debt Load

Evergrande's crisis highlights China's shortcomings

The Economist 24 September, 2021 - 07:10am

As well as being big, the system is inefficient at allocating capital, dragging down growth. Nor is this a problem the world can ignore. Chinese firms have issued roughly $1trn of dollar bonds, many of them snapped up by foreign investors. A liquidity crunch in China’s economy would hurt global activity, from commodity markets to the sales of luxury goods.

With an illiquid portfolio of property projects financed by $300bn of liabilities, 80% of them short-term, Evergrande has a huge liquidity mismatch. It has struggled to cope with new government rules designed to curb excessive borrowing in the real-estate industry but which may now have backfired.

While the dilemma of “too-big-to-fail” is common, many elements of the Evergrande saga highlight China’s shortcomings. Evergrande’s statements about whether it has missed interest payments have been confusing, leaving investors in the dark. It is unclear if the formal hierarchy of creditors matters or whether the Communist Party’s view of who counts will override it. The sense of opacity and political machination is part of a pattern. Huarong, a state-owned financial firm suffering from fraud, hid a $16bn loss for months. It was eventually bailed out in August.

Evergrande shows the importance of deeper financial reforms. But what might they look like? Liberal reformers have longed for a clean-up of bad debts, a loosening of controls over prices (including the exchange rate), transparency and independent courts that can enforce property rights. Such a system would allocate capital better and be less prey to moral hazard.

Mr Xi’s authoritarian regime helps financial stability in some ways: he sees excessive borrowing as a security risk and may terrify debt-hungry tycoons into being more cautious. The centralisation of power may make it easier to control crises at sprawling organisations such as Evergrande.

But his broad agenda to reassert control over the economy, information flows, courts and regulators cuts against the thrust of financial reform. Why would he want a more open capital account, which would raise the risk of capital flight following political purges, or private creditors to have stronger rights, or to delegate the role of picking tomorrow’s industries to investors? Even if Evergrande escapes calamity, the consequences of Mr Xi’s policies for the long-term health of the financial system are only just starting to sink in.

This article appeared in the Leaders section of the print edition under the headline "Bail-outs and bedlam"

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