While real estate giant Evergrande’s financial distress has been evident for weeks if not months, the prospects of an official default by the second largest developer in China roiled financial markets yesterday.
Having said that, we believe Evergrande was more likely just a news hook that helped trigger a swoon in markets already cautious about “peak growth,” “peak earnings,” “peak stimulus,” rolling supply shocks, and a general valuation narrative of “as good as it gets.”
In the aftermath of the market volatility, there has been a good deal of speculation over whether the People’s Bank of China will step in with added liquidity when domestic mainland markets re-open tomorrow. The answer will be a resolute yes from the PBoC to protecting and lubricating the financial system.
But the bad news is that the reason for that liquidity injection will extend beyond contagion from a purely Evergrande-triggered event, to stemming mounting pressure on a host of Chinese real estate firms that even if not quite as “fast and furious” with their business lines as Evergrande, have been independently coming under increasing pressure from slowing growth and excess leverage even before the Evergrande debacle. The South China Morning Post has an eye-catching article enumerating these firms.
We expect Beijing will try to ensure a smooth transition of Evergrande’s portfolio but expect a relatively hard line when it comes to resolution of the firm’s debt load.
Meanwhile, in the background and away from the volatility and turmoil of the financial markets, there has been progress on the US extradition case of Huawei CFO Meng Wanzhou that has been sitting in the Supreme Court of Canada’s British Columbia since her detention in December 2018 in Vancouver on charges of circumventing US law in conducting business with Iran.
Importantly, the deal that is being negotiated between the US Department of Justice and Meng’s lawyers is part of a broad political push to lower tensions on the economic front between the United States and China – not that the justice system would be politicized, of course.
Our understanding is that since President Biden came to office, Beijing has brought up the US extradition case against Meng repeatedly in backchannel discussions, and in every discussion with senior US officials since the Sino-US talks in Anchorage, Alaska in March of 2021.
In fact, sources in Beijing indicate that Meng Wanzhou’s case was even brought up directly by China’s President Xi Jinping in his call two weeks ago with US President Joseph Biden.
The current state of play appears to be that the DoJ will drop the extradition case if Meng admits her guilt, which appears to be a stumbling block still, and agrees to pay a hefty fine, which seems, as one might suspect, less of an obstacle.
While direct linkage of the Meng case to US-China (and of course Canada-China) relations may seem rather unseemly, in the words of one admittedly hardline senior Chinese official, “If the Biden administration wants to seek China’s cooperation on climate, counter-terrorism, the economy and trade, the release of Meng is a necessary condition.”
Bellicose threats aside, we suspect this rhetoric is further corroboration that a resolution in the Meng case is close at hand.