The Chinese government continued to indicate that it may allow its second-largest property developer, the Evergrande Group, to fall into its more than $300 billion in debt. In a recent message to local governments, Beijing called on these bodies to prepare for a possible Evergrande collapse.
Preparing its domestic investors appears to stand as a priority for the Chinese government. As well as instructing local authorities to prepare, Beijing recently invested $18 billion in its financial sector.
While the victims of Evergrande’s collapse are most likely to be hurt, it is the Chinese firms that benefit from its creation and the businesses it invests in, with several Western companies including US investment giant BlackRock also losing out on the situation. standing for.
Between January and August 2021, BlackRock acquired 31.3 million notes of Evergrande’s debt, Reuters reported. This jump in his stake in the firm raises Evergrande’s assets to one percent of the total of BlackRock’s $1.7 billion Asian High Yield Bond Fund. BlackRock isn’t the only Western firm to invest in the company.
Britain’s HSBC Holdings raised its stake in the failing giant to 40 percent during July, Reuters noted. Switzerland’s UBS Group raised its position to 25 percent by May. When it comes time for Beijing to restructure Evergrande’s assets, Stephanie Segal, an expert on Asian economics at the Center for Strategic and International Studies, said Chinese institutions could come before the West on the dividing table.
“You have had previous restructurings where there was differentiated treatment between domestic and foreign investors, so it is part of the playbook when it comes to this type of restructuring,” Sehgal said. newsweek.
Should Evergrande really collapse, BlackRock and others would lose out on the condition that the company could bounce back, potentially through a government bailout. Those investing in paying off Evergrande loans through BlackRock could face a significant financial setback.
In the restructuring, should the government take the lead, Beijing will decide which creditors get pieces of Evergrande’s assets. Sehgal said that given the company’s huge debt, these creditors may face a huge cut in their initial investment. When the government goes to split the pie, there are pieces left at least attractive to foreign investors like BlackRock. “There is concern that they will get less favorable terms than domestic investors,” Sehgal said.
This moment could set a new standard when it comes to investing in China. If Beijing doesn’t take steps to protect its second-largest property developer, Sehgal said investors could view Chinese investments as having greater credit risk than previously thought.
“Chinese officials really want to get more market discipline in the sense of appreciating investors that there is credit risk, so they have to take that into account,” Sehgal said. newsweek. “But, they are taking a gamble that they are going to be able to keep it contained and prevent other Chinese assets from spreading in a big way.”