By Ye Xie, Bloomberg reporter and macro commentator
China’s bailout of Huarong did little to shake the market’s conviction that President Xi Jinping is serious about addressing the moral hazard in the credit market.
One day after Beijing engineered the recapitalization of Huarong, financial regulators pressured Evergrande, the world’s most leveraged real-estate developer, to resolve its debt problem. In a rare public rebuke, regulators demanded the struggling developer refrain from spreading untrue information. Evergrande’s bonds due in 2022 fell to a record 47 cents on the dollar, even before the news came out late Thursday.
With nearly 2 trillion yuan ($308 billion) in liabilities at the end of 2020, Evergrande is bigger than Huarong, as Bloomberg Economics’ David Qu noted.So the fact that Beijing is determined to let Evergrande sort out its problem on its own shows that Huarong’s rescue is an exception rather than the rule.
The differences in the two companies explain the contrast in Beijing’s approach. While Huarong is a central-government owned company in a sector (bad-debt disposal) that plays a vital role in the economy, Evergrande is a highly-leveraged private company in a sector that the government wants to restrain. Equally importantly, it seems Evergrande still has room to maneuver, including selling assets and introducing strategic investors.
Despite Huarong’s rescue, investors have gotten the message. Sergey Dergachev, an emerging-market debt investor at Union Investment, said:
One key theme within China credit space going forward will be that credit differentiation will matter. The era when all Chinese credits performed well and have been relatively low volatile sub asset class within broader EM corporate debt are almost over. You need to be aware of potential regulatory risks, to carefully assess the importance of the company to the government (central or regional SASAC), their sovereign support assumption, and credit quality assessment.
Indeed, the dispersion of different Chinese credits has been wide and the contagion from Evergrande is rather contained, as Bloomberg’s Sebastian Boyd noted.