Evergrande and the end of the Global Financial Crisis

Welcome to the first issue of The Bender!

Less than two weeks after the 2016 election, the chairman of the Chinese insurance company Anbang, Wu Xiaohui, held a secret dinner in New York with Jared Kushner and his father-in-law, the president-elect. The goal was to finalize an investment by Anbang in the Kushner family’s most prominent, but troubled, real estate asset, 666 Fifth Avenue.

At the same time, HNA was on a global buying spree, spending over $17 billion to snap up overseas assets during 2016 alone. The company, which began as a regional airline operator based in the prison island turned resort destination of Hainan, had a clear focus: loading its balance sheet with stakes in influential and sensitive industries, like semiconductor, airport logistics, banking and real estate. By 2017, it was the largest shareholder in Deutsche Bank.

The same year, shares in Evergrande, a massive real estate developer,  hit their all-time high on the Hong Kong stock exchange, rising past $31. 

Now, Wu, who began his career running a car dealership before marrying Deng Xiaoping’s granddaughter, is serving an 18-year prison sentence for fraud. 

HNA, meanwhile, is bankrupt. Its founder and chairman, along with its chief executive, were arrested last month.

And Evergrande is failing. In recent weeks, it has been racked by a liquidity crisis, is likely insolvent and its shares are trading for about $3 apiece. By early next week, it could be formally in default.

The question is now just how bad Evergrande’s collapse will be for China’s economy and the world’s. Or, in colloquial terms, is Evergrande’s fall a “Lehman Brothers moment”?

To answer that, it’s important to understand what kind of moment Lehman Brothers actually was. 

A familiar type of abrupt market re-evaluation of risk and value, yes. But more consequentially, it was a moment when speculators made a rapid reappraisal of both a severely indebted institution and an entire web of assets that had sparked an economic boom, while also realizing to their horror that the government wasn’t going to help. 

Not only were mortgage-backed securities and other housing related debts suddenly and obviously worthless, but to Wall Street’s apoplexy, Washington, D.C. was initially fine with it. The Lehman Brothers Moment was, in other words, the market realization of a policy failure. 

The policy failure of not finding a way to effectively and justly bail out Lehman Brothers and the entire financial sector was only ever partially papered over by subsequent rescue packages. It lives on in conspiratorial murmurs of former Lehman executives who are convinced that they were done in by old rivals pulling federal strings and the accurate ambient sense that the suffering of the financial crisis and recession it caused were distributed inversely to culpability in causing it and ability to endure it.

Lehman Brothers also lives on in Chinese policy makers’ concerted aversion to letting such a thing happen under their watch.

Bluntly, Evergrande will not be a Lehman Brothers moment for China because the Chinese are not dumb enough to let it be. 

In more nuanced terms, the Chinese government is savvy, cynical and flexible enough in their view of how financial markets fit into their model of communist capitalism to effectively deal with this crisis.

They’ve done it before: first in dealing with the huge shocks of the financial crisis and Great Recession (the former was rocky as a huge Treasury buyer, the latter difficult as a export-focused economy), then in withstanding a retail stock-trading mania a in 2015 and 2016, the collapse of hundreds of peer-to-peer lenders that led to nationwide protests in 2018.

Evergrande is best understood as the latest and likely last in a series of speculative, private-enterprise boondoggles that the Chinese government is now intent on stopping. Government policies enabled the creation of several Chinese Angelo Mozillos and the government is not ensuring there won’t be any more. 

For global markets, that’s significant, because after the financial crisis, Europe and the US put in place a series of highly-contested, watered-down and slowly-implemented regulatory reforms that fell short in innumerable ways but have broadly made the banking system much less risky. 

The financial crisis was a crisis of trans-Atlantic speculation, with European investors shovelling cash into the American housing and banking systems. That sort of thing could not happen now at the scale it did before 2008 in Europe or the U.S. and with Evergrande sinking and a broader Chinese crackdown on speculation picking up pace, that sort of free flowing speculation can’t really happen – the global financial crisis (2008 - 2021) is now well and truly over. 

The PRC is doing Dodd-Frank with repressive state-capitalist tendencies and it looks so far like it’s working.

More broadly, China is continuing with policies aimed to bring an entire cohort of corporations to heel. For instance, Chinese regulators are pursuing financial market reforms that are pointedly directed towards Alibaba, which operates an Amazon-Ebay-PayPal-BlackRock conglomerate.

Reinforcing those regulatory reforms, there’s the entire party and police apparatus that can dispense discipline and reward in ways that are both far more complex and more blunt than anything in the Western world. Remember that the IPO of Alibaba’s financial arm, Ant, wasn’t just put on hold until certain corporate reforms were made, Jack Ma has been put through a series of public humiliations and attestations of party loyalty. 

The combination of these two tactics – the savvy regulators operating under Vice President Wang Qishan and the political party apparatus increasingly under the total control of President Xi Jinping – are China’s long-term answer to its recent market panics. 

And regardless, in the coming months, the Chinese has an even tougher problem to deal with: keeping economic output up while ensuring that the world sees blue skies when they tune into the 2022 Winter Olympics in Beijing.