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Beijing time for the choice of Evergrande

The headquarters of the Evergrande group in Shenzhen, Guangdong province, China.


Alex Plavevski / Shutterstock

While Beijing has a big plan to deal with the slow collapse of real estate giant Evergrande Group, it’s one of Asia’s best-kept secrets. It’s clear Xi Jinping’s government will step in to protect at least some of Evergrande’s creditors, but uncertainty over who will benefit and how becomes another risk.

Chinese investors and policymakers had known for months about Evergrande’s problem with managing more than $ 300 billion in liabilities. Since August, the company has missed three coupon payments on bonds issued outside of China, although it is not in default thanks to 30-day grace periods.

Yet no one knows what Beijing intends to do. A direct bailout that preserves Evergrande in its current form seems unlikely. The company’s woes are part of Beijing’s larger campaign to lower house prices and reduce real estate debt. Nor will Evergrande obtain a Western-style bankruptcy based on the legal seniority of the creditors. This would reassure investors about the rule of law in China.

But the Communist Party does not risk harming the small businesses of Evergrande’s suppliers or the homebuyers waiting for Evergrande to build units they have prepaid for. These creditors could become big losers in a traditional bankruptcy, and some have staged protests outside Evergrande’s offices. Mr. Xi cannot afford more social discontent.

Beijing’s plan so far appears to be to kick the box. Beijing is relying on banks to refrain from paying deferred interest, and it appears to be preparing to hand over unfinished construction projects to other developers. This is what Logan Wright of the Rhodium Group calls the “silent bailout” because it happens without Beijing releasing a plan.

Beyond that, it’s up to everyone to guess. Foreign investors assume, probably correctly, that they will be big losers, but no one knows by how much. Uncertainty is disrupting the foreign market for bonds issued by Evergrande and other real estate companies.

Evergrande’s suppliers might be the thorniest issue. Many have converted accounts receivable into negotiable credit that flows like money in China’s gray financial system. Failure to repay could create financial panic. Unorthodox solutions such as offering goods to creditors instead of cash could take more cash out of the economy than Beijing intends.

Beijing will also be concerned about households that have purchased Evergrande-backed wealth management products. These are poorly regulated, bond-like financial products that are marketed by banks and others as a “safe” high-interest alternative to low-interest savings accounts. Allowing these products to fail would cause hardship for middle class savers and potentially more political unrest.

Xi is running out of time to abandon the silent bailout in favor of a more explicit plan. Greater clarity comes with risks. Households and investors could react badly if they conclude that Beijing’s plan is insufficient. But the silence becomes more and more dangerous as the uncertainty spreads to other businesses.

Beijing isn’t the first government to deviate from normal bankruptcy rules, as Americans can attest after the 2008 financial panic. But if that’s not the plan, authorities should tell households and investors what it is.

Best and Worst of the Week by Kim Strassel, Jason Willick, Mene Ukueberuwa and Dan Henninger. Photo: Bloomberg

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