How Does China Plan to Avoid the Evergrande Financial Crisis?

“The government can put them under surveillance and pressure them not to cause trouble through their employers or relatives,” said Minxin Pei, a professor of government at Claremont McKenna College, who wrote a study on China’s internal security apparatus.

China owes much to its ability to contain the fallout from an Evergrande collapse. Xi Jinping, China’s most powerful leader for generations, has described reining in financial risk as one of the “big battles” for his management after starting his second term in 2017. As he approaches a possible third term in power, which will begin next year, his government’s mismanagement of Evergrande could be politically damaging.

But China’s problem may be that it controls financial panics too well. Economists inside and outside the country argue that the security measures have spoiled Chinese investors, leaving them too eager to lend to large companies with a low probability of repayment. But in the long run, China’s bigger risk may be to follow in the footsteps of Japan, which has suffered years of economic recession under the weight of large debts and slow, inefficient companies.

By not signaling strongly for an Evergrande bailout, the Chinese government is essentially trying to force both investors and Chinese companies to stop channeling money to risky, heavily indebted companies. Still, this approach carries risks, especially if an uneven slump upsets Chinese home buyers or frustrates potential investors in the real estate market.

Eswar Prasad, a professor of economics at Cornell University, said Evergrande’s sudden default on a wide range of debt “could be a useful catalyst for market discipline, but could also hurt both domestic and foreign investor sentiment.” China section of the International Monetary Fund.

Some global investors worry that Evergrande’s problems represent a “Lehman moment”, a reference to the 2008 collapse of the Lehman Brothers investment bank, a harbinger of the global financial crisis. They warn that the collapse of Evergrande could unleash other debt problems in China and hit foreign investors with significant Evergrande debt and other property developers in the country.