China views on the art of restructuring
Amid the financial crisis, Wang Qishan, then Chinese vice premier, expressed his disappointment to Hank Paulson, his longtime friend and US counterpart on bilateral financial and economic issues.
The two had known each other since the late 1990s, when Paulson, while still at Goldman Sachs, advised Wang and other top Chinese executives on a series of initial public offerings by large state-owned companies and banks. . But as documented in the memoirs of the former US Secretary of the Treasury, Dealing with China, a decade later, Wang watched in disbelief as Wall Street dragged the global economy into the abyss.
âYou were my teacher, but look at your system, Hank,â Wang said as Bear Stearns, Lehman Brothers and Merrill Lynch failed or were cheaply snapped up by rivals. âWe’re not sure we should learn more from you. “
Wang, who has since become vice president of China, and his Chinese Communist Party colleagues have since learned a lot about handling their own corporate bankruptcies. In recent years, the party has presided over the restructuring of national giants such as the conglomerate HNA and Anbang Insurance. Now he turns his attention to an even bigger challenge – the so far slow-motion collapse of real estate developer Evergrande. Like Paulson and his colleagues at the US Federal Reserve, who feared the consequences of the moral hazard of the Lehman Brothers bailout, the party does not want to set a precedent by bailing out Evergrande.
Unlike them, the party has a lot more leverage at its disposal to ensure Evergrande slowly fades away, reducing the shockwaves of its collapse. These include party control over the media, the central bank and creditors of the Evergrande state bank, which owe around a third of its $ 300 billion in liabilities. If Wang had only known in 2008 what he knows now, here is what he could have taught his teacher about the art of restructuring, just like the Chinese Communist Party:
Never surprise the market. Annoy him instead.
Evergrande admitted that he would default on his debts on December 3, missed the bond payments on December 7 and was declared in “limited default” by Fitch Ratings on December 9.
Markets yawned widely, mainly because they had been warned that this moment was very likely as early as mid-August, when China’s central bank appealed to Evergrande’s management for a high-level reprimand. Between that date and the fait accompli of last week, Evergrande also made a series of last-minute bond repayments that only delayed the inevitable, but gave the market more time to let go of the illusions according to him. which Beijing could save Evergrande. Investor sentiment towards other indebted developers has been hit hard, but not much else.
All politics are local, so pay people protesting outside City Hall first.
Local authorities across China used the months of September, October, and November to secure Evergrande’s bank accounts in their jurisdictions and ensure they were set aside to complete ongoing developments – many of which were funded by down payments by home buyers – as well as contractors, some of whom protested against the developer’s headquarters in Shenzhen in mid-September.
They also met in September to strike deals with retail investors who had bought high-yielding Evergrande investment products – months before international investors finally made a serious decision to form creditors committees and to try to engage Chinese officials.
Don’t just blame the CEO. Remove it from public view and reserve the right to stop it.
The People’s Bank of China reiterated its criticism of Hui for the Evergrande woes in October and early December. Aside from brief reports on Hui urging employees to persevere and reassuring everyone that everything would be fine, Evergrande’s founding president has been invisible for the past few months. It is also known as the Jack Ma treatment.
There are worse fates. As the restructuring of HNA was completed earlier this year, the two main executives of the conglomerate, Chen Feng and Adam Tan, were arrested. Meanwhile, Ma, whose flagship e-commerce and online finance groups have been at the center of a regulatory frenzy over the past year, is still far from the public spotlight but can once again enjoy a lavish vacation at abroad. If Hui is lucky, he will likewise vanish into luxurious and understated insignificance.