Evergrande Finally Defaults

Where China stands - and were it's goingGet our weekly dispatches from Beijing.

After struggling for months to make payments on its mountain of debt, Evergrande finally defaulted on a bond. Rather than this marking a “Lehman moment,” nothing much really happened.

The final deadline for the company to make good on two bond payments came and went Monday with bondholders not getting their money. By Thursday, Fitch Ratings had publicly labeled it a default. 

Instead of market panic, China’s benchmark CSI 300 stock index hit a five-month high and the country’s currency gained to the strongest against the U.S. dollar in three years. There was even a rally in dollar bonds sold by China’s lowest rated issuers.

What gives? Just as the deadline for Evergrande’s bond payments was ticking down late on Monday, China’s central bank announced it was cutting how much the country’s commercial lenders would have to set aside as reserves. By doing so, 1.2 trillion yuan, or about $190 billion, would be released into the economy.

There was more. The Politburo, China’s 25 most-senior political leaders,  met on Monday and issued a communique that suggested there would be an easing of curbs on the real estate industry. That could help revive a market that saw home prices fall for the first time in six years in September, followed by an even bigger decline in October.

Falling Home Prices

Chinese home prices fell month-on-month in both September and October

In addition to the more dovish language about property, the communique named stability as the top priority. The implication is Beijing will do its upmost to limit how much Evergrande’s woes affect the broader economy.

As reassuring as Beijing has been, the calm that ensued does belie the challenges ahead. Evergrande still owes a lot of people a lot of money. It had more than $300 billion of total liabilities at the end of June. In addition to $19.2 billion outstanding in bonds, the company has suppliers and contractors to pay, and apartments it’s taken payment on but not delivered.

Working through that pile of debt will be slow and arduous, with plenty of losses to go around.

Yuan Strength

China’s currency has been on a tear. The yuan has appreciated about 2.4% against the U.S. dollar this year, and on Wednesday advanced to the strongest it’s been since May 2018. That didn’t sit well with the central bank, which a day later took steps to curb those gains by ordering commercial banks to hold more of their foreign currencies in reserve.

That move appears to have been an attempt by the People’s Bank of China to squeeze speculators out of the currency. The yuan’s gains this year have been largely fueled by strong exports and a steady inflow of foreign investors into Chinese government bonds. But Beijing’s decision to cut the reserve requirement Monday also sparked an increase in bets that easing by China would lead to faster economic growth. If there’s one thing the PBOC dislikes, it’s the yuan being used to wager on where it will take policy next.

Lithuanian Spat

Ties between China and Lithuania have deteriorated since the Baltic nation agreed in July to let Taiwan open a diplomatic office there. Beijing has recalled its ambassador, downgraded ties and stopped offering consular services at its local embassy. It may have also shut its doors to Lithuanian goods.

Lithuania, a member of the European Union, said late last week it was seeking assistance from the EU after reports surfaced that the country’s name had been removed from China’s electronic customs declaration system. As a result, Lithuanian goods were being barred from entering Chinese ports. While Beijing has yet to respond, the state-run Global Times newspaper reported that Lithuania was still in the system.

Lithuanian Imports

China's imports from Lithuania surged 13-fold from 2010 to 2020

Source: China's General Administration of Customs

Trade between the countries has surged over the past decade, but overall volumes are relatively small. China was only Lithuania’s 12th largest trading partner last year. The danger is if Beijing’s spat with this nation of less than 3 million people escalates into a dispute with the EU.

Olympic Boycotts

The Olympics, as much as they’re supposed to be about sports, also have a long history of political protest. That continued this week with the U.S., U.K., Canada, and Australia announcing diplomatic boycotts of the Beijing winter games in February. While athletes from those countries will go, no government officials will travel to China to partake in the festivities.

Beijing was not pleased. Responding specifically to the U.S. boycott, Chinese Foreign Ministry Spokesman Zhao Lijian said Washington was “standing opposed to athletes and sports lovers across the world.” He added that the U.S. would pay a price for its actions, without elaborating.

One response some onlookers have floated is a Beijing boycott of the 2028 Summer Olympics in Los Angeles. If the U.S. and China are still wrangling in 2028, the next six years will be a bumpy ride.

The Olympic flame for Beijing’s winter games on display on November 5, 2021 in Beijing, China. (Photo by Hou Yu/China News Service via Getty Images)

Photographer: China News Service/China News Service

What We’re Reading

And finally, a few other things that caught our attention:

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